RBNZ policy reviews has been a rollercoaster ride, Westpac economist says
The period leading up to the Reserve Bank’s (RBNZ) policy reviews has been marked by significant uncertainty, leaving experts and markets guessing about the central bank’s next move.
Despite recent economic data, there remains a considerable degree of speculation regarding the RBNZ’s approach, particularly with inflationary pressures and market expectations diverging from initial forecasts.
Mixed signals in the economy
Recent economic indicators have presented a mixed bag, challenging earlier predictions of the RBNZ’s policy tightening in 2024.
In its November Monetary Policy Statement, the RBNZ unexpectedly warned of possible further tightening in 2024 unless inflation pressures quickly subsided. The bank highlighted persistent domestic inflation and wage growth, migration-driven demand, a rebounding housing market, and insufficient fiscal policy support as key concerns delaying the disinflation process.
“Developments following the November Statement moved the market’s thinking further away from the RBNZ’s message,” said Michael Gordon (pictured above), senior economist at Westpac.
“The GDP report for the September quarter was substantially weaker than expected, and growth over the preceding year was also revised down sharply from what was first reported. At this point we removed our forecast of a further OCR hike in 2024, while noting that the RBNZ would still be wary of taking the brakes off too soon.
“Markets were also especially moved by the weakening in traded goods, airfares and food shown in the selected price indices for December.”
Inflation expectations and housing market trends
Inflation expectations have shown a slight decrease, but the speed of this shift remains a concern for the RBNZ.
Despite the volatility, there's cautious optimism that headline inflation will align with the RBNZ's target range before 2025. Yet, achieving this goal without a significant easing in the labour market may prove challenging, Gordon said.
Additionally, the housing market’s sluggish start to the year, with decreased sales activity and stagnant house price trends, underscores the broader economic challenges. Retail spending and price indices for January have also reflected a stable yet cautious consumer sentiment.
RBNZ’s delicate balance
As the RBNZ navigates these turbulent waters, the upcoming Monetary Policy Statement is expected to lean towards a hawkish stance, potentially signaling a sooner-than-anticipated tightening.
However, the ongoing debate between easing and tightening camps underscored the delicate balance the RBNZ must strike to ensure disinflation without derailing economic recovery.
“We expect another hawkish statement later this month, that could potentially threaten policy tightening sooner than indicated last November,” Gordon said. “We see that as consistent with continuing with the ‘longer’ strategy, while managing the risks that the current OCR might not deliver sufficient disinflation. And the prospect of OCR cuts will remain distant in the RBNZ’s projections.”
Read Westpac’s NZ Weekly Economic Commentary here.
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