RBNZ Monetary Policy Statement May 2023

The RBNZ tightened by 25 points to 5.5 percent and expressed confidence that this will be sufficient to bring inflation back to target. We continue to see risks that the large migration surge will ultimately require more action after July.

RBNZ Monetary Policy Statement, May 2023

The RBNZ increased the OCR as expected to 5.5 percent.

However, the big surprise was in the forward profile, in which the RBNZ strongly suggests that it is on hold from here until at least mid-2024. We see some upside risks to the RBNZ’s view, but for now see the RBNZ on hold in July, with some potential of a 25 point rise in the OCR in August.

Migration pressures are acknowledged, but the RBNZ takes a sanguine view on their impact on capacity pressures. The RBNZ’s net migration estimates are higher and imply a net 75,000 net inflow in the year to December. This is only slightly lower than Westpac’s equivalent forecast of a net 83,000 inflow (on a working-age population basis). Despite the upgrade, the RBNZ’s view is that this adds significantly to supply as well as demand. Migration is seen as having some supportive impact on house prices but by not as much as we have taken in our recent Economic Overview.

The RBNZ has upgraded its view on potential output growth, which means it has higher growth but less inflation. Implicitly, migration is adding to the economy’s capacity in tandem with demand on resources, allowing the economy to grow more strongly without adding to inflation pressures.

Government spending is not seen as a significant driver of inflation pressures. The RBNZ has inserted the recent Budget estimates into its projections and takes a sanguine view on any inflation implications. While government is adding somewhat to inflation pressures in the next year, the RBNZ’s view is that the assumed fiscal consolidation in later years will balance out those pressures.

Ongoing emphasis on pipeline tightening pressures seen as sufficient to reduce inflation significantly. There is considerable emphasis on the pipeline of interest rate increases still to be felt by households and businesses. As a result, consumer spending and residential investment are forecast to remain weak.

For the first time the Committee held a vote on the OCR decision, debating between no change and a 25 point hike. Two members voted for no change and the others for the 25 point increase. Some members discussed potential upside risks to house prices and the economy from migration, but on balance the MPC felt sufficiently confident that a 5.5 percent OCR will be sufficient to balance those risks.

The bottom line is that this is a central bank that sees itself on hold for a protracted period. Key risk factors are likely to be around the judgement of the RBNZ that the quite significant boost in population growth will quickly reverse and not add to housing market or inflation pressures. Data on house prices and migration will be important to watch in that regard. Similarly labor market indicators will be important to watch.

We now see the RBNZ on hold in July, but some potential of a 25 point rise in the OCR in August. Should this not eventuate we anticipate the RBNZ to remain on hold until after the election in October. By this time we expect that the housing market and migration pressures will be showing up fairly strongly and require a further adjustment in the OCR to the 5.75-6.00 percent range.