New Zealand’s central bank is poised to raise interest rates for a 12th straight meeting and may signal it’s not done yet as surging immigration and looser fiscal policy counter its efforts to curb demand.
(Bloomberg) — New Zealand’s central bank is poised to raise interest rates for a 12th straight meeting and may signal it’s not done yet as surging immigration and looser fiscal policy counter its efforts to curb demand.
The Reserve Bank will lift the Official Cash Rate by 25 basis points to 5.5% Wednesday in Wellington, according to 18 of 21 economists in a Bloomberg survey. Three see a 50-point move. The RBNZ may leave the door open to further tightening by lifting its forecast track for the OCR beyond the 5.5% peak in its current projections.
“Fiscal spending and a surge in migration suggests a higher peak in interest rates than signaled in February,” said Kelly Eckhold, chief New Zealand economist at Westpac Banking Corp. in Auckland, who predicts the OCR will reach 6%. “The RBNZ may not move immediately to Westpac’s 6% OCR peak, but will signal an openness to getting there.”
New Zealand may avoid the 2023 recession the RBNZ has been expecting as record inflows of migrants and the rebuild from a devastating cyclone boost economic activity. At the same time, inflation is slowing and the full impact of the RBNZ’s record tightening to date has yet to be felt, with many mortgages still to roll onto higher rates.
The RBNZ publishes its decision at 2 p.m. local time Wednesday and Governor Adrian Orr holds a press conference an hour later. The bank will release new forecasts in its quarterly Monetary Policy Statement.
More People
Several leading economists revised up their OCR projections last week citing soaring immigration, which may ease labor shortages but also add to aggregate demand for goods, services and houses. Westpac estimates a net inflow of 100,000 people in 2023, adding almost 2% to the population.
Economists also cited the government’s May 18 annual budget, which was more expansionary than expected due largely to the costs of the cyclone rebuild.
The cash rate is now expected to peak at 5.75% in July, according to the median forecast in Bloomberg’s survey.
On the other side of the ledger, inflation slowed to 6.7% in the first quarter and inflation expectations declined.
The RBNZ delivered a bigger-than-expected 50-point rate increase at its previous meeting in April, which may argue against another big increase this week, said Stephen Toplis, head of research at Bank of New Zealand in Wellington.
“There are some who believe the main reason the RBNZ went 50 at its last meeting, when most thought 25 was the most likely outcome, was because it had decided to minimize the chance that it would have to be aggressive post Budget so as not to become embroiled in the political process,” he said. “This line of reasoning may have some merit.”
With a general election looming in October, opposition parties are already arguing that the budget will stoke inflation and lead to more mortgage pain for households.
Jarrod Kerr, chief economist at Kiwibank in Auckland, said the RBNZ is likely to remain hawkish to keep a floor under wholesale interest rates and fend off bets on eventual rate cuts, though the cash rate ultimately won’t need to rise above 5.5% as the full force of the rapid tightening begins to be felt.
Still, “more government spending, the cyclone rebuild, and the spike in migrants reduce the chance of a recession,” Kerr said. “The upside risks to inflation will concern the RBNZ, and we cannot rule out further rate rises beyond 5.5%, or a 50-point move on Wednesday.”
–With assistance from Tomoko Sato.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.