“There’s been a clear shift in the conversation around what’s going on”
The Reserve Bank of New Zealand’s Monetary Policy Review will be delivered today, and analysts say that given the strong indicators from across the economy, we can likely expect a “change of language” compared to what we have heard throughout the course of the pandemic.
According to Westpac’s Michael Gordon, the past few weeks have seen a “clear shift” in the direction in which the economy is heading. He said that a rise in business confidence and expectations for inflation mean the Reserve Bank will likely pursue a “normalisation” of policy settings over the coming months, starting with a potential OCR hike in November.
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“There’s been a clear shift in the conversation around what’s going on in the New Zealand economy,” Gordon said.
“We’ve been hearing for some time about the constraints on the supply side, and all of those things point to a spike in inflation this year.”
“It’s a theme that will probably continue throughout the rest of this year, though that on its own is not something that the central bank should be responding to, and nor can it really,” he explained. “Monetary policy tends to work over longer horizons, more like one to two years ahead.”
Gordon noted that a lot of the next steps will depend on demand and business confidence, which is already looking “more upbeat” compared to previous months. He noted that Westpac’s predictions have been echoed by most other forecasters, and said that the Reserve Bank will indicate a move away from long-term emergency settings in this latest review.
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“We’ve seen firms become more upbeat about their activity, hiring, investment and profitability, even with all these supply pressures,” Gordon said. “These are markers of strong demand, and so we’ve changed our forecasts to reflect that.”
“We now expect the Reserve Bank to start increasing the Official Cash Rate from November of this year, and other forecasters have come to pretty similar conclusions,” he added.
“As for today’s Monetary Policy Review, we expect that the Reserve Bank will start to shift its language away from what it’s previously said about ‘time and patience’ to meet its targets, and start to lay the groundwork for a normalisation of policy settings over the coming months.”
