Expect another two OCR increases, biggest bank says
Friday, 9 February 2024
New Zealand’s biggest bank has scrapped its forecast for official cash rate (OCR) cuts from August, and now says there will be two more increases.
ANZ now predicts a 25 basis point hike in both February and April, which would take the rate to 6%.
It then said cuts would happen from February 2025, eventually taking the OCR back to 3.5%.
The bank noted that the Reserve Bank had warned in November that the OCR would probably have to rise again if inflation pressure was stronger than anticipated.
ANZ economists said the data since November had been a series of small but unwelcome surprises, including stronger consumption growth in GDP data than expected, higher-than-expected domestic inflation and employment data, slightly higher migration and “very sticky” high-frequency pricing intentions and cost measures which ANZ said had stalled in a “pretty worrying fashion” for mote than six months.
“None of them are game changers, but given the starting point was the Reserve Bank already very nearly over the line to hike again, no game changers are needed.”
Swap rates also fell significantly before Christmas and some banks have moved to cut interest rates, which could concern the Reserve Bank.
Brad Olsen, chief executive of Infometrics, said he did not share ANZ’s view but could see a situation in which it could happen.
“The biggest challenge is in our minds when we’ve looked through the data there have been a few surprise son either side. The general theme, the general tone of where the numbers are going has been consistent. It’s not happening as quickly as the Reserve bank might have wanted but they’re getting there.”
But he said the Reserve Bank could have made a rod for its own back.
“In our view, now is the time to stay the course. Last time the Reserve Bank said it had a good probability of hiking further, and it’s tough given markets basically shrugged them off and said ‘we’ve looked at all this data and we’re still pricing in pretty big cuts’.
“It might well turn out to be impossible for the Reserve Bank to talk tough without following through with the tough talk.”
He said it was a question of how forwards- or backwards-looking the bank was.
“When inflation got to 7.3%, the Reserve Bank wasn’t even pulling out 75bps increases at that point. When inflation is falling, they’re going to pull out a few more 25bps? If that’s the case I would argue when it hit 7.3% they should have pulled out a 150bps bazooka.”
He said there were still interest rate increases yet to be passed on to households.
“We don’t forecast a raise, we don’t think the Reserve Bank will raise but we can understand how they might come to the view that they do want to raise. We do think that would be the wrong call and now is the time to stay the course.”
Westpac chief economist Kelly Eckhold said he did not expect the OCR to move this year.
“While there are certainly are indicators that have disappointed the Reserve Bank in recent months we see these as consistent with the Reserve Bank’s resolve to maintain the OCR at 5.5% for a protracted period to ensure inflation returns to the middle of the target range. A tightening is a possibility but probably only a 25% chance at this stage.”
Mike Jones, chief economist at BNZ, said further OCR increases were a risk that could not be ruled out.
“Indeed, the odds of such have probably nudged up in the wake of this week’s robust labour market numbers.
“But our core view is still that the Reserve Bank will continue to, nervously, sit on its hands and keep the OCR unchanged from here.
“Falling inflation, an economy out for the count, a slackening labour market, and a housing market that so far hasn’t lived up to fears of resurgence all suggest to us that the bank doesn’t need to fire any more shots.”