NZ CPI Review: OCR Now Expected to Peak at 5%

It is expected that the official Cash Rate to reach a peak of 5% for this cycle and also a 75 basis point hike to 4.25% at the upcoming November Monetary Policy Statement, a step up from the 50 basis point increases in the last few reviews. Inflation in continuing to run red-hot across the economy, and core inflation is yet to show signs of easing despite the sharp rise in interest rates over the past year.

It is also seen that ongoing firmness in domestic economic conditions, including a drum tight labor market and resilience in household demand.

Today’s inflation figures were unexpectedly bad. Prices are not only rising quickly but across the board, which increasingly points to a common cause rather than special factors. And even though forecasters were braced for a strong number today, the result beat all expectations. Combine that with a sense that domestic demand is holding up in the face of the interest rate hikes that we’ve seen to date, and it looks like the Reserve Bank has more work to do yet.

The large rises in those specific areas, we’re seeing inflation running red-hot across the economy. The broad-based nature of inflation pressures was reflected in the suite of core inflation measures released by Stats NZ today, which smooth through the quarter-to-quarter swings in prices and track the underlying trend in inflation. Most core inflation measures are now running above 6%- well above the RBNZ’s 1-3% target band.

With resilient economic activity, the current strong inflation pressures are likely to be with us for some time yet. We’re also likely to see further increases in wage rates, which would reinforce the pressure on domestic prices. Against this backdrop, the RBNZ will need to take the cash rate much further into tight territory than they had previously anticipated.