The Reserve Bank of New Zealand (RBNZ) has already lifted the official cash rate to 4.75%, which is among the most aggressive tightening in the developed world.
ANZ’s economics team believes the RBNZ will hike the cash rate another 0.5% to a peak of 5.25%, and then keep it at this level through 2024.
Although “headline inflation appears to be peaking, both in New Zealand and around the world”. ANZ is concerned that the “inflation pulse rotating away from goods and towards sticky services prices”:
In particular, the tight labour market has caused wages to soar, which is driving the strong growth in services inflation:
ANZ explains the wage-price challenge as follows:
“The causality in this relationship will run both ways (higher wages will see service providers raise prices, but higher prices will also influence wage demands)”.
“The interplay between services and wage inflation means that for this component of inflation to ease, we need to see demand and supply in the labour market become better aligned”.
“Until this happens, we run the risk of seeing inflation remaining too high over the medium term (even if it eases from current levels)”.
Accordingly, ANZ believes “the evolution of labour market pressures over 2023 will be key for understanding the likely path of interest rates over the next few years”.
This points to inflation remaining higher for longer. ANZ “therefore continue to expect the RBNZ will hike the OCR to a peak of 5.25% by May 2023, before holding rates at this level until at least the end of 2024”:
ANZ’s forecast is less aggressive than the RBNZ’s, which last month forecast a peak in the cash rate of 5.50%, alongside a recession and a 23% peak-to-trough fall in house prices.
