Westpac Now See RBNZ Taking Rates To 6%

Westpac note a higher OCR is needed to bring inflation back to target:

"While demand and supply will balance out in the medium term, in the short term there will be more demand. That’s at a time when the RBNZ’s plan was for sub-trend growth to open up sufficient excess capacity to sustainably bring inflation down from the current very high levels. This marginal demand is likely to translate to more persistent inflation pressures and will delay the return of inflation to target.

Hence, we argue here that the tightening cycle is not yet over, and that more insurance is required to be sure of bringing inflation back into the target range. We see the OCR rising further to 6% by August and remaining there until mid- 2024 when it should be clearer that inflation pressures have substantially moderated. By then CPI inflation should hopefully be closer to 4% and falling. For the Reserve Bank, the prospect of reaching the promised land of 3% inflation will be more than just a figment of an economic forecaster’s wild imagination."

"As always, significant risks to this central outlook exist – but our sense is that these remain to the upside in terms of inflation persistence and hence interest rates. A key upside risk is the size and amplitude of the migration cycle we are now firmly within. We have included a reasonable assessment of what might be expected but if a greater and more protracted migration cycle eventuates then we would expect the net demand impact on the economy and inflation to be greater and more persistent. If inward migration triggers an early return to a strong housing market, then the resultant boost to consumption, investment and the labour market could really challenge the assumption that inflation expectations remain anchored to the 1-3% target range."