Rates High For Even Longer

The 0.2pp overshoot of the RBA’s Q1 CPI forecast seems to have driven a hawkish shift. Rates may now need to stay restrictive for “longer than anticipated”. The RBNZ’s upward revision to its OCR path and the discussion of another hike reflect this. It said “rate cuts continue to be delayed”. Rates are now not expected to be materially below 5.5% until H2 2025. The decision to leave rates at 5.5% was unanimous.

• Risks to inflation are skewed to the upside but the MPC is more confident though “that inflation will decline to within the target range over the medium term” helped by easing capacity pressures. The RBNZ is concerned that certain higher services prices, which it has little impact on, will boost inflation expectations.
• Q3 2024 CPI is now expected to be at the top of the 1-3% target band, similar to the November 2023 forecast but 0.4pp higher than assumed in February. It now does not reach the mid-point until Q2 2026, half a year later than expected in both February and November. The slow moderation in services inflation is to blame as well as low productivity.
• As a result the Q4 2024 and Q1 2025 OCR assumptions have been revised up 10bp with Q2 up 20bp to 5.5%. Governor Orr has said in the past that the OCR path is not a target and small moves can reflect subtle changes in the bank’s model, but it is monitored by markets closely. The path assumes rates will be 20bp higher than in February for end-2025 and -2026.
• Quarterly growth was revised lower over 2024 and 2025 with the unemployment rate 0.1pp higher in Q4 2025 and 2026.