MNI: Wildcard Data Raises Chances Of RBNZ Nov Hike - Ex Staff

Stronger-than-expected employment or CPI data in October alongside Thursday’s solid GDP and elevated levels of government spending could force the Reserve Bank of New Zealand to raise its Official Cash Rate from 5.5% as soon as November, former Reserve officials told MNI.

John McDermott, executive director at Motu Economic and Public Policy Research and former RBNZ assistant governor, said the central bank had failed to contain non-tradable inflation, while oil price spikes could again cause tradable and goods prices to rise.

He noted an October CPI print of 6% or above will increase the chances of action when the monetary policy committee meets Nov 29. “That will be a really interesting meeting – a couple of weeks ago it was safe to think the RBNZ may hold, but November’s meeting will now be on a knife’s edge,” McDermott argued, noting the MPC will likely maintain the OCR at its next Oct 4 meeting.

“The RBNZ's strategy involved getting to 5.5% and holding well into 2024. That strategy seems to be moving away." He warned a November rise, if it happens, will represent a late cycle hike, "done despite a weakening economy when unemployment is still climbing. This will not be an easy decision.”

STRONG DATA

Q2 GDP grew by 0.9% q/q, 40bp higher than expected by the market and the central bank within its August Monetary Policy Statement, Stats NZ reported Thursday. The RBNZ expects GDP to decline 0.3% over Q3 and 0.1% in Q4 before returning to growth over 2024.

Michael Reddell, independent economic commentator and former RBNZ special adviser, noted the MPC will not want to hike before the general election on Oct 14, but agreed a November increase was possible. He said fiscal policy had added upward pressure to inflation.

The MPC has held the cash rate at 5.5% for the last two meetings after a cumulative 525bp hike this cycle, but pushed out its peak OCR forecast to mid-2025 at the August meeting. (See MNI RBNZ WATCH: OCR Path Rethink As Core Inflation High)

Reddell noted government spending had fueled demand and activity and the MPC will likely place greater emphasis on these issues in October. “It's probably contributed to the GDP number as well and I suspect the huge migration inflow – the population is growing just over 2% a year – has contributed to that growth in real GDP, even if per capita GDP goes backwards,” he said.

“The bank will finally have to move and that seems like a reasonable call. We haven't seen any real sign yet that core inflation is coming down.” Keeping monetary policy on hold too long will increase risks of a deeper recession later, he said.

MNI reported in August the RBNZ expects the OCR to hold at 5.5% well into 2024 unless further data surprises force a change to projections. (See MNI INTERVIEW: Rates To Hold, But Upside Risks - RBNZ's Conway) Chief Economist Paul Conway stressed the central bank had moved into “watch, worry and wait” mode. Traders expect the OCR to peak at 5.76% by April 2024.

DEAD CAT BOUNCE

But Geoff Mortlock, financial consultant and former financial stability advisor at the RBNZ, doubted whether Q2’s GDP would change the OCR’s trajectory. He said the Reserve will remain forward looking and focused on factors likely to reduce inflation over the coming months.

After adjusting for migration, GDP only gained 0.2% in Q2, he noted. Some one-off factors, such as consumer spending and construction delays following North Island floods, also boosted the result, Mortlock added. H2 and H1 2024 indicators will weigh on the RBNZ’s deliberations, he commented.

“They are looking quite bleak, with indicators for manufacturing, investor and consumer confidence, dairy prices, and the impact of higher mortgage rates all pointing to a resumption of recession later this year and in 2024,” he noted. “I think the June quarter result can be seen as aberrant. I continue to believe that [New Zealand] will be in recession in 2024 and on per capita GDP terms it will be quite bleak indeed.”