New government's forms as central bank gears up for final rate decision of 2023
The new government officially formed last Friday, as the Reserve Bank of New Zealand (RBNZ) gears up for its final cash rate decision of 2023, according to Kiwibank economists.
Newly formed government
In Kiwibank’s latest First View publication, the bank noted that National, Act, and NZ First form the next three-year government, sharing Cabinet seats –14 for National and three each for Act and NZ First. Christopher Luxon is prime minister, with Winston Peters and David Seymour sharing the deputy prime ministers, for the first and second half of the term, respectively.
Jarrod Kerr, chief economist, and Mary Jo Vergara, senior economist (pictured above, left to right), said that in terms of coalition agreements, the proposed policies appeared largely expected.
But a couple of points worth noting, the Kiwibank economists said, are (1) National plans to fund tax cuts with spending cuts instead of a foreign buyer tax; (2) potential return of mortgage interest deductibility and adjustments to the Brightline test to help the housing market; (3) a “return” of RBNZ’s focus on price stability, though this won’t likely change how monetary policy works.
Click here to read about industry response to formation of new government.
Kiwibank’s cash rate forecast
The cash rate has remained unchanged since RBNZ’s last hike in May, and Kerr and Vergara suggested that the central bank should keep it at 5.5%.
“We remain of the view that the RBNZ has done more than enough to cool the economy, and drive inflation back down to the 2% target midpoint,” they said. “The data to date suggest no further rate hikes are needed. Inflation is falling, the labour market is loosening, and the economy is slowing. The RBNZ can sit tight, watch the data unfold, and simply trust the process. Monetary policy is working.”
The Kiwibank economists said RBNZ faces a significant challenge in raising interest rates further, as recent data, including lower-than-expected inflation and a rise in unemployment to a two-year high of 3.9%, indicates that the economy is slowing down.
“Looking beyond November, we believe the RBNZ’s next move will be down – not up,” Kerr and Vergara said. “The RBNZ should soon be in a position to begin normalising monetary policy in 2024. The RBNZ was among the first major central banks to hike interest rates. And the RBNZ could be among the first to cut rates (we hope).”
While there’s speculation about a possible future rate cut, the exact timing remains uncertain, contingent on forthcoming data, especially inflation prints.
“A later commencement of the rate-cutting cycle is more likely,” the Kiwibank economist said. “But before we scrap May altogether, we’ll wait for what the RBNZ has to say on Wednesday. More specifically, we’ll wait for what revisions are made to the OCR track – a two-year forecast of the cash rate.”
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