Is another OCR hike needed to tame inflation?

Is another OCR hike needed to tame inflation?

The past week has been one of mixed news for borrowers with regards to where interest rates are headed over the coming year. On the positive side the unemployment rate has just been reported as rising to 3.9% in the September quarter from 3.6% in the June quarter and 3.2% a year earlier. Job numbers also fell by 0.2%.

Weakness in the labour market eventually means weakness in wages growth

That is where there is still a long way to go before the Reserve Bank can feel inflation is comfortably headed back below 3%. The main wages measure which we economists follow recorded growth of 7.1% in the September quarter compared with a year earlier.

This rate is down from 8.6% a year ago. But it is well above the 3.5% rate consistent with inflation averaging just over 2% in the three decades after 1992. Allowing for the fact that weak business investment means the pace of labour productivity growth in New Zealand has probably slowed further from an already low pace, the extent to which wages growth exceeds that consistent with low inflation is worse than suggested here.

We also got news on the not good side for inflation from a couple of monthly surveys by ANZ

Their monthly Business Outlook survey showed that in October, a net 46% of businesses said they plan raising their selling prices over the coming year. This is down from the peak of 81% in March 2022. But the pace of decline is unusually slow, and with the long-term average 25% the latest outcome is again well away from that needed for low inflation confidence.

Their survey of consumers with Rony Morgan showed a rise in the average expectation for where inflation will sit in a year’s time to 4.5% from 4.2% a month earlier. That is the wrong direction for this measure to be moving in, and again will be a signal to the Reserve Bank that interest rates have no scope to fall in the immediate future.

Some forecasters believe the Reserve Bank will need to raise the official cash rate from the 5.5% level they took it to in May this year. But with extra restraint since then already in place as a result of rises in United States' interest rates causing fixed mortgage rates to go up here, such extra restraint may not be necessary.

Perhaps one good piece of news has come from offshore

Despite the deteriorating military situation in the Middle East, there has been no sustained extra upward pressure on oil prices. There is no solid talk of a repeat of the oil embargo of 1973/74 which saw oil prices quadruple and propelled global inflation much higher for one and a half decades.

But no-one knows what is going to happen in current war zones (Ukraine included), so this risk cannot be discounted entirely.

We continue to live through minimally predictive times and that is why borrowers should consider spreading their interest rate risk over at least two time periods. Even if this simply means a mix of the 12, 18, and/or 24 month terms rather than opting for three+ years, some insulation against the uncertainty and volatility which is still with us will be achieved.

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