VIEW: ASB Tweaks Call

ASB note that “today’s CPI inflation print made for worrying reading, with annual inflation having a 7+ handle, annual non-tradable inflation hitting record highs and with distributional and core measures showing a widening front of price increases. While annual CPI inflation looks to have peaked this cycle, the inflation outlook is still highly uncertain and far too high for the RBNZ’s comfort. We have long been wary of the risk of annual CPI inflation staying outside the inflation target for considerably longer than expected by the RBNZ, and today’s prints supports the view of high inflation becoming increasingly entrenched. As such, more restrictive OCR settings earlier than envisaged are required, and we now expect 50bp hikes in August and October, a 25bp November hike and a 3.75% end of 2022 OCR peak. However, persistently high inflation runs the risk of more aggressive OCR action, including a possible 75bp August hike and higher OCR endpoint this cycle. We have pencilled in OCR cuts from 2024 but this will depend on there being sufficient slack in the labour market and the external inflation environment cooling, both of which have shown few signs of doing so to date.”