High costs domestically are one of the biggest factors as to why it seems unlikely that the central bank will cut the official cash rate (OCR) any time soon.
Today the Reserve Bank of NZ (RBNZ) chief economist Paul Conway said the rapid hikes of the last few years (from 0.25 in September 2021 to 5.5 in June last year) had helped cool inflation – but there was still a way to go.
“Monetary policy is working, with the economy slowing and inflation falling, but we still have a way to go to get inflation back to the target midpoint,” he said.
Despite warning of a long path ahead, Conway wouldn’t give any indication as to where the OCR would go at the bank’s next update in February.
The RBNZ’s target is to get inflation – the rise in price we pay for goods and services – down to between 1 and 3%.
In the 12 months to December inflation was 4.7% – the smallest increase in two years – but still above target.
Conway said it was lower than the central bank’s pick of 5% for the same time period. But he said of concern was non-tradeable inflation – the price paid for goods and services in New Zealand – which was sitting at 5.9%.
“It’s a long way from 2%,” he said. “As I said, we have a ways to go, we are getting there, we are making progress, but it’s a long way to go.”
He said while overall inflation is driven by prices here, as well as those offshore, it’s domestic inflation that monetary policy is most likely to affect.
However, the RBNZ economist acknowledged global tensions were volatile and could also have a roll on effect to economies around the world – including here in New Zealand.
Of concern at the moment are the attacks on ships in the Red Sea, as Houthi rebels in Yemen attack cargo ships that travel between Asia, Europe and the United States – something the RBNZ is looking at.
“How is that going to play out? It seems to be bubbling away with aggression across a broader swathe of the Middle East. It is definitely a risk.”
Speech ‘hawkish’ – senior economist
His comments today were of little surprise to economists at New Zealand’s main banks.
Westpac’s senior economist Satish Ranchhod described the speech as “hawkish” as it pushed back on market expectations that things might ease.
“Overall we view today’s comments as being consistent with our forecast that any easing in policy is still some way off. Market pricing for easing in the first half of this year still seems premature.”
BNZ’s head of research Stephen Toplis predicted the next cut in the OCR wouldn’t be till the second half of 2025 – but he couldn’t rule out another hike all together.
“While we are forecasting the RBNZ to stand pat in February you’d have to say that the chances of a hike are much greater than the zero chance of a February cut.”
But Toplis said it was concerning to see the RBNZ so fixed on the domestic factors driving inflation given the significant proportion of what’s driving prices up will not be affected by interest rates.
“A substantial proportion of current non-tradeables inflation can be attributed to four factors, which are in some cases inter-related,” he said.
These were, local and central government charges; the country’s infrastructure deficit; the impact of climate change; and increased insurance claims for natural disasters.
Toplis said the other factor at play is population growth and its impact on housing and local government costs.
He said the RBNZ can do little in this space, as it can’t direct government policy, and higher interest rates won’t improve the weather, curtail population growth or fix key infrastructure issues.
Toplis said a better approach might be to rethink the bottom line, “to simply be less dogmatic about getting inflation to the mid-point of the target band”.
The next review of the OCR is due out on February 28.