Westpac economists maintain their market-outlier prediction that the Reserve Bank of New Zealand will raise the Official Cash Rate (OCR) again next month.
The Reserve Bank startled economists by raising the OCR by 25 basis points to 5.5% in May, but then suggested in its May Monetary Policy Statement (MPS) that it envisaged no additional increases.
The central bank’s ‘pause’ appeared to be firmly in place last week in its follow-up OCR review, with the main element of the Reserve Bank statement being:
“The [Monetary Policy] Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1% to 3% per annum, while supporting maximum sustainable employment”.
The next OCR review is set for 16 August and Westpac’s Weekly Economic Commentary explains why it believes the Reserve Bank will hike by 25 basis points.
“Westpac remains of the view that the OCR will be increased by 25bps to 5.75% at the August Monetary Policy Statement”, the report reads.
“Partial indicators suggest the labour market has not cracked yet, which raises the likelihood that the RBNZ will need to upgrade its growth forecasts for this year”.
“This would add some upside risk to the inflation outlook and lengthen the already protracted period over which inflation remains above the target range”.
“As a result, we aren’t yet convinced that the door to an August tightening has been closed, although the hurdle to moving through that door remains high”, Westpac argues.
“The news from the household sector has been a little more upbeat. Consumer spending in the retail sector rebounded 1.0% in June”.
“Meanwhile, the housing market continued to establish a base in June. After adjusting for seasonal factors, sales rose 2.2% – the fourth consecutive increase – and were almost 15% higher than a year earlier”, Westpac notes.
Westpac’s forecast seems heroic given its 10 July report forecast that ‘effective’ mortgage rates paid by New Zealand households will rise a further 150 basis points into 2024 as fixed rate mortgages expire:
Retail sales volumes are falling:
Per capita household spending is also forecast by Westpac to fall by around 2% over 2023 and 2024 combined. “And with household spending accounting for around 60% of total economic activity, that will be a significant drag on economic growth”:
Those are not the economic conditions that will prompt the Reserve Bank to hike.
I am tipping that it will remain on hold at next month’s OCR meeting.
