Banks talk up chance of 'triple' rate rise next month after inflation hits 7.3%

Monday, 18 July 2022

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

Annual inflation has reached 7.3%, which is higher than most economists were expecting
ANZ is now forecasting the OCR will rise to 4% in November
Infometrics economist Brad Olsen says it is the breadth of inflation that is the new worry

ANZ and ASB say the Reserve Bank may hike the official cash rate by 75 basis points to 3.25% next month, after Stats NZ reported annual inflation jumped to a higher-than-expected 7.3%.

Inflation is now at its highest since June 1990.

The inflation figures for the three months to the end of June prompted economists to warn inflation could be tougher to tame than they’d hoped.

Bank economists and the Reserve Bank had forecast the annual inflation rate would come in at 7% or 7.1%.

* Inflation figure above 7.2%, or below 7%, would be likely to move the market

* Government extends fuel tax relief, half price public transport until January 2023

ANZ now expects the Reserve Bank will raise the official cash rate by 0.5% three more times this year, taking the OCR to 4% by November.

But it said there was a “real possibility” of a 75 basis point hike next month, particularly if unemployment data on August 3 delivered another hawkish surprise.

The Reserve Bank more usually changes the OCR by 25bp, but ASB senior economist Mark Smith agreed the inflation data meant a triple hike was a possibility.

He forecast inflation would remain well above 6% over the rest of this year, saying that even if inflation had peaked, it seemed “highly unlikely” it would drop quickly.

Economists hope and expect this quarter’s inflation figure will be the peak.

Infometrics principal economist Brad Olsen, who correctly forecast inflation would reach 7.3%, said price rises for food, fuel and rent “lived up to expectations”.

“More surprising and worrying is the broader and faster rise in costs outside these major groups, which shows inflation becoming more broad based,” he said.

Westpac forecast an “ongoing squeeze on households”, with senior economist Satish Ranchhod also noting high inflation was “not just due to a few specific items”.

“Price pressures have been boiling over in every corner of the economy,” he said.

The political reaction to the inflation figure was swift, with National Party finance spokesperson Nicola Willis calling on the Government to focus on “strengthening the productive economy and unlocking the bottlenecks in the economy that are worsening inflation”.

Its plan should include “fixing failed immigration settings and stopping adding costs to business”, she said.

But Finance Minister Grant Robertson said the inflation rate reflected the volatile and uncertain global environment and there were “no simple fixes”.

Inflation would remain “elevated for some time at levels above what has been experienced in recent times”, Robertson said.

But he said low unemployment and Crown debt meant the Government was well-positioned “to support New Zealanders to get through this challenging time”.

Finance Minister Grant Robertson announces the cut to fuel excise and half-price public transport will be extended until next year. (First published July 17)

Petrol prices leapt 32% over the year while diesel prices were up 74%, Stats NZ reported.

Globally, demand for diesel was exceeding supply, it said.

The cost of building new houses surged 18% over the year and was the biggest single contributor to the higher inflation rate.

Grocery food prices were up by marginally less than the overall inflation rate, rising 7.1%, while rents were up 4.3%.

The prices of so-called “tradeable” goods and services, whose prices are largely set overseas, rose 8.7% during the quarter.

But the prices of locally-produced non-tradeable goods and services rose by 6.3%, which was ahead of most economists’ expectations.

“The spread of inflation will be worrying for the Reserve Bank,” Olsen said.

That view appeared reflected in currency markets, with the New Zealand dollar rising a third of a US cent by the mid-afternoon on the back of the Stats NZ release.

Capital Economics economist Marcel Thieliant said the higher-than-expected inflation made it more likely the OCR would peak higher than its own forecast of 3.5%.

“But we still think that weaker economic activity will force the bank to stop tightening before long,” he said.

The crumb of comfort in the inflation data is that the quarterly increase in prices, at 1.7%, was below the 1.8% increase recorded in the March and the 2.2% jump in the September quarter.

But the Treasury believes the fuel tax cuts and public-transport fare cuts that were put in place by the Government in March, and which have now been extended to the end of January, knocked 0.5% off that quarterly figure, indicating it would otherwise also have been about 2.2%.

The impact of the fuel tax cuts will be reversed next year, assuming they are phased out from February.

Despite that, economists expect Monday’s figure will mark the peak of inflation, and that the rate will fall when Stats NZ reports the September-quarter figures on October 18.