Inflation curbs monetary easing
The Reserve Bank (RBNZ) is expected to continue its conservative approach to monetary policy, maintaining the OCR at 5.5% and adhering to its long-standing “watch, worry, and wait” strategy, according to Westpac NZ’s Kelly Eckhold.
Persistent inflation concerns
Eckhold said that despite weak economic growth, inflationary pressures remain a significant concern.
The RBNZ predicts inflation will only gradually return to near the 2% target by the end of 2025, based on the current OCR trajectory.
“The economy remains downbeat, with slower spending and investment continuing,” Eckhold said, emphasising the ongoing challenge of managing inflation within the target range while fostering economic stability.
Recent economic indicators
The RBNZ’s stance comes amid mixed economic signals since their last assessment in February.
While there have been slight downward adjustments in GDP growth and some sectors showing weaker performance, inflation expectations among businesses have moderated.
However, household inflation expectations remain elevated, complicating the path to easing inflation pressures.
Future projections and market response
Eckhold suggested that RBNZ’s projections will likely remain consistent with previous forecasts, indicating a possible 40% chance of an OCR increase in 2024 but starting to reduce the rate to 5.25% by mid-2025.
“We don’t expect any significant change to the RBNZ’s strategy,” Eckhold said. “They are likely to reiterate the need for the OCR to remain at 5.5% for a sustained period.”
Scenarios and market implications
Westpac NZ outlined three potential scenarios for RBNZ’s future monetary policy direction:
- Baseline case: Most likely, the RBNZ will continue with the current OCR, balancing persistent domestic inflation with weaker growth.
- Hawkish case: There is a smaller chance that the RBNZ might find inflation too sticky, potentially leading to earlier rate hikes.
- Dovish case: Less likely is an earlier easing of the OCR if growth weakens further and inflation pressures diminish more than expected.
Read Westpac NZ’s Preview of RBNZ May 2024 Monetary Policy Statement.
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