One of New Zealand’s biggest banks has forecast the country’s reserve bank to lift the official cash rate 50 basis points on Wednesday in a bid to “rein in runaway inflation” and avoid a “deep recession”.
In its Monetary Policy Review Preview, the ANZ said it expected the Reserve Bank of New Zealand to increase the cash rate to 1.50 per cent to reel in a “wall of inflation” that is “vertical and, so far, completely unyielding”.
ANZ Chief Economist Sharon Zollner forecast inflation to peak around 7.5 per cent.
“Inflation is far too high,” she said.
“Core inflation is far too high. Inflation expectations are far too high. And firms’ pricing intentions, which have been the best inflation indicator of all, are stratospheric and, at this point in time, still rising.”
Ms Zollner said the RBNZ typically described its policy decisions in terms of “least regrets” and following its February meeting it stressed it had to ensure consumer price inflation and inflation expectations didn’t persistently climb beyond target levels.
She said the biggest regret would be losing inflation-targeting credibility and watching as inflation beame unanchored.
“Fixing that would require far higher interest rates, and very likely a deep recession and sharp rise in unemployment, to solve – a la 1991,” she said.
“For now, it’s still entirely reasonable to both hope and forecast that the inflation problem can be resolved with a ‘soft landing’, a relatively gentle slowdown that doesn’t involve an ugly unemployment rate.
“But the higher inflation expectations are allowed to go, the slimmer those hopes become.”
Ms Zollner said the key points affecting the economy post-February included the war in Ukraine, the fuel tax being cut 25 cents, a one per cent fall in trade, the ANZ commodity price index surging almost 4 per cent, and consumer confidence falling sharply despite the “shock value” of the Omicron variant dissolving.
House prices have also fallen for three months in a row and an increase in commodity prices evening out a rise in the New Zealand Dollar Trade Weighted Index.
Ms Zollner said these factors meant the economy was likely to cool as consumers acted more cautiously.
“At this stage, it’s a case of pick your poison,” she said.
“Yes, aggressive hikes now raise the odds of a hard landing for the economy in the near term, but going too slowly would raise the risks of an even harder landing further down the track.”
Ms Zollner said a 50 basis points hike on Wednesday would provide the “path of least resistance” for markets, given rises totalling 126 basis points were priced in over the next two to three meetings.
This is likely to be followed by 25 basis point rises.
Offshore events also play a role in what the RBNZ does, with rate rises expected in the US and here in Australia in the near future.
While some experts have tipped just a 25 basis point rise in New Zealand this week, Ms Zollner said it would cause “some real volatility and potentially confusion”.
“It would likely see forward expectations concertina back in as the market recalibrates itself to a new 25 basis point meeting speed limit, driving the short end lower,” she said.
“But it could also do some real damage at the longer end of the curve (10 years-plus), where yields might rise as markets start to price in wider inflation and term premiums.”