Key Facts

  • Westpac economists predict that the Reserve Bank of New Zealand (RBNZ) will increase the Official Cash Rate (OCR) again at its February review, despite markets predicting a drop in the OCR by August 2024.
  • Contrary to market expectations, the RBNZ delivered a strong, hawkish message in its latest OCR review, raising the prospect of an OCR increase later in 2024.
  • The RBNZ appears to be focusing on ensuring inflation hits the middle of the target range in the next 18-24 months, leading to increased risk for further tightening.
  • The RBNZ is unlikely to consider easing policies unless significant weak points emerge in future data on core inflation pressures and housing market trends.
  • Westpac economists will monitor several key indicators in the lead up to the RBNZ’s February 2024 OCR review, including Q3 GDP reports, migration and housing-related data, the Half-Year Economic and Fiscal Update (HYEFU), and Q4 CPI and labour market reports.
  • Kiwibank economists predict a decrease in the OCR in 2024, but later than their original forecast of the first half of the year.
  • Increases in migration are having a double impact on the economy, offering a large pool of available workers to reduce wage pressure, while increasing demand for goods and services, particularly in the housing market.
  • Changes to the RBNZ’s Remit and Act to make inflation control the sole focus are not expected to significantly impact policy.

Article Summary

Westpac economists remain optimistic that the Reserve Bank of New Zealand (RBNZ) will implement a further increase in the Official Cash Rate (OCR) during its February review. This is despite the broad market prediction of an initial drop in the OCR, which currently stands at 5.5%, by August 2024.

The RBNZ’s recent hawkish stance came as a surprise to many, predicting an OCR rise later in 2024. In response to ongoing inflation, strong population growth and an upward revision of the long-run neutral OCR, the bank appears to be shifting its focus more aggressively towards hitting inflation targets within the next two years. This indicates a decreased tolerance for surprises related to inflation and a heightened likelihood of further economic tightening.

Looking forward to the RBNZ’s February 2024 OCR review, Westpac economists will be keeping a close eye on several key data points and events, such as the Q3 GDP report, migration and housing data, and the Half-Year Economic and Fiscal Update (HYEFU). Similarly, Kiwibank economists anticipate a decrease in the OCR during 2024 although later than their initial prediction.

The economists also noted the double-sided impact of increasing migration on the economy. On one side, an increase in available workers is reducing wage pressure. On the other side, more people are creating higher demand for most things, which is noticeably visible in the housing market. The RBNZ is now especially cautious of the strengthening demand factor. The Westpac chief economist doesn’t believe that changes prioritising inflation control in the RBNZ’s Remit and Act will largely influence policy conduct.

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