Reserve Bank OCR call: ‘We are on the edge of our seat’
The stakes are high for borrowers and the reputations of economic pundits alike as the Reserve Bank meets to make a big call on whether or not to raise the official cash rate.
ANZ chief economist Sharon Zollner said she was “out on a limb” after forecasting the central bank would raise the official cash rate (OCR) by 25 basis points both on Wednesday and when it issues its next full statement on May 22. That would take the key interest rate to 6% – significantly above the inflation rate which was last measured at 4.7%.
No other major banks have followed Zollner’s lead, forecasting instead that the Reserve Bank will leave the OCR unchanged at 5.5%.
Reserve Bank governor Adrian Orr voiced increased impatience at its last monetary policy statement in November over how long it was taking to bring down inflation.
The bank’s chief economist, Paul Conway, has telegraphed it is minded to take a far less relaxed approach to any inflationary shocks from overseas than in the past, as it seeks to more firmly anchor people’s expectations of future headline inflation at about 2%.
Like most analysts, HSBC regional chief economist Paul Bloxham was forecasting a “hawkish hold” with the Reserve Bank emphasising inflation was still too high but that it was heading in the right direction.
He believed the central bank would stick to its November forecast that the OCR would not start to come down until some time next year.
But mixed economic data over the past few months appears to make the task of second-guessing the Reserve Bank harder than usual. “Although GDP figures and the rising unemployment rate suggest recessionary conditions, strong employment growth indicates otherwise,” Bloxham said. “With all these moving parts, we expect an extra strong focus on inflation, and inflation expectations, for guiding the central bank's plans.”
Zollner said the balance of risks was “very skewed” towards the Reserve Bank having done too little in its fight against inflation.
But she also said the evidence of that was not overwhelming. Stats NZ reported that retail sales fell 1.9% in the December-quarter, after adjusting for inflation and seasonality.
Although that probably came too late to be built into the Reserve Bank’s GDP forecasts, that was “weak as a kitten”, she said.
“I'm sure it will be in the mix when they make their decision.”
Zollner agreed it was quite possible the Reserve Bank’s monetary policy committee wouldn’t reach a consensus on whether or not to the hike the OCR, which would mean the decision would need to go to a vote for only the second time ever. “It’s a big deal raising rates into a clearly weakening economy,” she said. “I would expect that different people would have quite different thresholds before making a decision like that.”
The only time to date that an OCR call has gone down to a vote was in May last year, when two of the seven members of the Reserve Bank’s monetary policy committee dissented from a decision to raise the OCR by 25 basis points to 5.5%.
Kiwibank chief economist Jarrod Kerr expected the Reserve Bank would signal “a very forceful, hawkish bias” without actually raising the OCR, but wasn’t ruling out a hike.
“We are on the edge of our seat,” he said.
Kerr believed a split decision was possible but a consensus was more likely.
Leaving the OCR unchanged would be a bit like crying wolf, he said. “Being hawkish is one thing, delivering a hike is another.”
BNZ research head Stephen Toplis remained adamant there was “no justification” for a a further rate hike.
“We’re basically in a recession and unlikely to come out of it any time soon. The unemployment rate is rising, the labour market is easing aggressively and inflation, both headline and underlying, is falling. Retail sales have been contracting for eight quarters and manufacturing contracting for 11 months. Tourism, which was saving our butts, seems to have stalled.
“Even net migration appears to have turned the corner. And, by the way, monetary policy operates with a lag, so we haven't yet seen the full influence of rising interest rates.”
Toplis said he could understand why the Reserve Bank might be keen to say rates were not expected to come down until next year – given that at one point markets had been pricing-in four rate cuts this year — even though that would not be BNZ’s approach.
“There’s always an element of uncertainty with central banks. They sometimes look at things that we don't look at and reach conclusions that we don't reach.”
But if the Reserve Bank did hike, the first thing BNZ would do would be to “lower our growth forecasts to an even deeper recession and the second thing that we'd do is ultimately put more aggressive rate cuts into our track”, he said.