RBNZ on hold in August, OCR forecast revised higher.
First Impressions RBNZ August 2023 Monetary Policy Statement
- OCR remains at 5.5% as expected.
- Near term growth outlook revised up, and OCR profile revised higher to 5.6% (March-June 2024)
- Around 40% chance of a further rate hike to 5.75%.
- Assumed neutral OCR revised up 25 basis points to 2.25%, lifting the OCR profile.
- CPI inflation gets back inside the range September 2024.
- Medium term CPI profile unchanged although with higher interest rates.
- Westpac retains its call for a 25-basis point increase in the OCR in November.
Steady as she …. oh wait!
The RBNZ left the OCR unchanged as widely expected at 5.5%. The overall tone of the statement is broadly unchanged although a touch more hawkish for the immediate period given the OCR track has been revised slightly higher (the updated OCR track now shows around a 40% chance of one further rate hike to 5.75% in the first half of 2024. In contrast, the RBNZ’s previous forecasts did rise above 5.50%).
The peak in the OCR has been pushed out to the first half of 2024 and easing is delayed an extra quarter – now in Q4 2024 or Q1 2025 vs Q3 2024 previously.
A reason the RBNZ now sees the risk the OCR will need to rise again is their reassessment of the long-run neutral level of the OCR. The RBNZ’s estimate of the long-run neutral OCR has been revised up 25bps to 2.25%. This means that the RBNZ now believes that the OCR has not been constraining activity to the extent they had thought, and rates therefore need to be higher.
The Bank sees upside risks to growth and inflation in the near-term, with the unemployment rate now forecast to rise more slowly than in May. Looking towards the medium-term, the Bank emphasises downside risks to the growth and inflation outlook from the weaker external outlook, especially as regards China. This is unsurprisingly given recent negative trends in dairy prices. Indeed, following last night’s auction, current dairy prices appear about 10% weaker than the Bank’s assumed cycle low point.
The upside risks centre around the still elevated core inflation measures as shown by the June quarter CPI out-turn. The RBNZ has also revised up their house price projections as we foreshadowed in our Monetary Policy Statement preview. Over 2024 the RBNZ sees house prices rising around 3% compared to the small fall forecast in May. A near term uplift in exports is also lifting activity.
The RBNZ has analysed the inflationary impact of migration and tentatively concluded that the inflationary impacts will be positive but lower than seen historically. More research is underway.
The inflation profile is broadly unchanged over the medium term. The RBNZ still expects the CPI to return to the target range in Q3 2024, though that is now predicated on a slightly higher OCR. The RBNZ has upgraded its near-term profile for non-tradables inflation reflecting the surprise in the June quarter outturn and an expectation of higher non-tradables inflation in the September 2023 quarter.
The RBNZ’s updated policy assessment now more closely matches our own view that there is still more work to be done to ensure inflation returns to the target range sufficiently quickly. The short-term bias in the OCR track implies that the choices for the MPC in future meetings will range between no change and a further OCR increase. Westpac continues to expect a 25-basis point increase in the OCR at the November Monetary Policy Statement.
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