Preview: Inflation and growth strength point to further RBNZ tightening, BNZ says
With markets already pricing a 94% chance of a hike, the September decision itself carries limited surprise potential, shifting focus to how the RBNZ frames the path beyond it. BNZ’s own inflation forecast of 3.7% for the September quarter, well above the RBNZ’s own July projection of 3.3%, points to a growing gap that could force more aggressive guidance than markets currently expect. The key pricing question is whether October and December both carry live hike risk, with futures currently reflecting only one further move across those two meetings.
BNZ says a hike at the September 2 meeting is essentially locked in, but believes the RBNZ will ultimately need to tighten further and faster than its own guidance currently suggests.
Summary:
- BNZ expects the RBNZ to raise the cash rate 25bp to 2.75% at the upcoming September MPS, calling it a near certainty given 94% market pricing.
- The RBNZ is expected to signal further tightening toward a peak of around 3.5%, though BNZ’s own house view has the cash rate reaching 4.0% by May 2027.
- BNZ forecasts September quarter annual CPI at 3.7%, above the RBNZ’s own July assessment of 3.3%, with growth also tracking at least as strong as expected.
- Downside risks include a possible El Nino driven recession, election related delays, and a global asset price correction; upside risks centre on structural inflation and weaker output growth.
- A softer unemployment rate is unlikely to deter the RBNZ, with employment and wages both running a touch stronger than anticipated; Q2 retail sales slowed to 3.3% annual growth, weighed by a 13.1% drop in fuel volumes.
BNZ expects the Reserve Bank of New Zealand to raise the Official Cash Rate by 25 basis points to 2.75% at its upcoming September Monetary Policy Statement, describing the move as effectively a done deal given markets are already pricing a 94% probability. BNZ expects the RBNZ to signal further increases are likely until the cash rate reaches or exceeds neutral, with a published peak of roughly 3.5%. BNZ’s own house view, however, has the cash rate ultimately rising 25bp at every meeting until reaching 4.0% by May 2027.
BNZ flagged risks in both directions, though it judges downside risks somewhat more prominent, including a potential El Nino driven recession, election related delays to the recovery, and a broader global asset price correction. On the upside, it pointed to the possibility that structural inflationary pressures continue building regardless of central bank responses.
Central to BNZ’s view is the RBNZ’s July language that further reduction in monetary stimulus was likely required to return inflation to target. BNZ expects inflation to stay above the target band until mid-2027, forecasting 3.7% annual CPI for the September quarter, well above the RBNZ’s own 3.3% projection, with growth also tracking at least as strong as expected. Oil prices, while below their peak, have risen 12% since immediately before the RBNZ’s July commentary, undercutting some of the disinflationary comfort the central bank had drawn on.
On the labour market, BNZ said the only plausible reason for the RBNZ to pause would be higher unemployment, but with employment and wage growth both a touch stronger than expected, it sees this as insufficient cause for hesitation. BNZ expects Friday’s data to show a 0.4% lift in Q3 employment, an 11-quarter high, enough to halt the rise in unemployment. Q2 retail sales fell 0.5% quarter on quarter, slowing annual growth to 3.3%, though core ex-auto sales still rose a solid 0.7%, with BNZ expecting some bounce back in the September quarter as fuel costs retreat further.
This article was written by Eamonn Sheridan at investinglive.com.