In my previous column on interest rates two weeks ago I said that no easing of monetary policy in New Zealand is imminent as wholesale interest rates had climbed a bit in response to the stronger-than-expected December quarter employment data.
But since then, one major bank’s forecasters have predicted that the Reserve Bank will raise their current 5.5% official cash rate to 6.0% in the very near future.
That is not likely to happen
First, much as the stronger-than-expected jobs data were not helpful in the context of inflation at 4.7% needing to go a lot lower, the numbers reflect what was happening with our economy in the past. Jobs data lag the economic cycle. More than that, the survey which produced the data has an established history of throwing up weird results every few quarters and the way in which the jobs strength was at odds with other labour market measures suggests this may have been one of those quarters.
Second, when we dig below the headline rate of inflation and look at core measures, we see some of them falling at a faster pace than they went up over 2021-22. This is important because the Reserve Bank have stressed that it is these core measures which it is paying most attention to and not the headline rate everyone sees in the newspapers.
Third, the full impact of rapid increases in NZ interest rates from mid-2021 has yet to be felt on the economy and inflation. There are still many people yet to reset their fixed mortgage interest rate from a low level to around 7%. They have yet to truly feel the cashflow hit of higher rates so have not yet perhaps cut back on their spending as the Reserve Bank is aiming for.
Fourth, the Reserve Bank has probably already allowed for inflation not falling as quickly as they would like with their forecast in November that they would not cut interest rates until the middle of 2025 at the earliest.
Fifth, if the Reserve Bank did raise the cash rate another 0.5%, they would be strongly at odds with the moves expected soon by other central banks and would risk sending the NZ dollar up quite sharply. This would be helpful in reducing imported inflation but could produce too much weakness in our economy as both the high interest rates and high exchange rates would be newly hitting us at the same time.
The outcome of another 0.5% rate rise would likely be excessive and unnecessary volatility in the NZ economy which is something the Reserve Bank is instructed to try and avoid.
The most likely outcome?
Chances are, at their coming review of the economy and monetary policy on February 28 we see the same expressions of concern about inflation as they delivered in November. And we are likely to see the same comment regarding not easing monetary policy until the middle of 2025. But we are not likely to see them put their cash rate up.
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