Key Facts:


– Economists believe the Reserve Bank of New Zealand (RBNZ) will leave the Official Cash Rate (OCR) at 5.5% in its upcoming meeting.
– Hawkish forecasters argue that inflation is embedded in the economy and the OCR will need to be lifted further and held higher for longer.
– Dovish forecasters believe that the monetary policy tightening will subdue inflation, and interest rates may need to be cut as the economy slows.
– Market pricing indicates a 13% chance of a rate hike in February 2023, followed by cuts afterward.
– Some economists anticipate the OCR to drop to 4.75% and even further to 4% next summer, while others expect rates to be reduced gradually to 3% over the following two years.

Article Summary:


Economists are divided on the future direction of New Zealand’s interest rates. The consensus is that the Reserve Bank of New Zealand will keep the OCR steady at 5.5% in its upcoming meeting. However, there are contrasting views on what will happen when the Monetary Policy Committee reconvenes in February. Hawkish forecasters believe inflation is entrenched and the OCR will need to be raised higher and remain elevated for a longer period. On the other hand, dovish forecasters argue that the recent monetary policy tightening will subdue inflation, and interest rates might need to be cut due to an economic slowdown.

Market pricing indicates a lower chance of a rate hike in February, with expectations of rate cuts in the future. However, some economists believe that this outlook is still too hawkish. They anticipate a further drop in the OCR, with one research team suggesting it will reach 4.75% by next summer. These economists believe that the economy will remain weak, leading to rising unemployment and easing wage pressure. They also expect the Reserve Bank to be satisfied that enough has been done to address inflationary pressures.

There are contrasting views on the impact of the current OCR. Some economists, like Jarrod Kerr, believe that the full effects of the 5.5% OCR are still working their way through the economy and that it will prove to be high enough. On the other hand, former International Monetary Fund economist Kelly Eckhold believes that the OCR needs to be raised even further and held at that level until the end of 2025.

Infometrics, an independent economic research firm, aligns with market pricing, suggesting that the OCR will only be lowered once inflation is under control. They argue that the RBNZ has used strong language and OCR projections in the past to discourage rate cut expectations. The yield on a 10-year government bond has increased, likely pleasing the RBNZ, which prefers wholesale rates to remain high.

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