The Ready Reckoner assesses how recent data will affect the RBNZ’s OCR projections.
RBNZ Ready Reckoner, May 2022
The February Monetary Policy Statement projected the OCR to reach a peak of 3.35% by the end of 2024. At the April policy review, the RBNZ indicated that it was comfortable with that peak rate but would look to get there faster. The implication is that its forecasts would have had a higher OCR peak than in February if there was no change in the pace of rate hikes.
The Ready Reckoner is intended to be a pure read on the balance of recent data, before any judgements are applied. As such, it’s even more important than usual to emphasise that this is not a prediction of the RBNZ’s actions. The RBNZ has already signalled that any change in outlook is likely to be expressed via the slope of the OCR track rather than the end point.
There’s been plenty of local economic data since the April review, but it’s mostly been along the lines of confirming what was already suspected about inflationary pressures, rather than providing any new shocks. Meanwhile, global economic conditions look tougher and commodity prices have given back some of their gains. Overall, we think this will leave the RBNZ in a similar position to where it was in April, with a need for somewhat tighter monetary policy over the next few years.
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February MPS implied OCR forecast (Q1 2024): 3.3%
Net impact of shocks since February: +20bp
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Near-term inflation: +25bp
The CPI rose 1.8% in the March quarter, above the RBNZ’s forecast of 1.4%. The surprise was entirely on the tradables side, including the jump in oil prices that followed the Russian invasion of Ukraine. The RBNZ’s forecast for the June quarter is likely to be close to its February MPS forecast of 1.1%, but would have been much higher if not for the cuts to fuel excise and road user charges. Arguably these are a look-through for monetary policy given their temporary nature, but to the extent that they affect the reported inflation rate, they will also have an impact on people’s expectations of future inflation.
Inflation expectations: +20bp
The survey of expectations for inflation two years ahead was little changed at 3.3%. With the survey coming hot on the heels of the strong Q1 inflation result, there was a risk that expectations might have pushed higher. Even so, they remain outside the RBNZ’s target range over the crucial medium-term horizon. In addition, surveys of longer-term expectations have also risen further above the 2% midpoint of the target, although breakeven rates on inflation-linked bonds are similar to where they were in February.
Border reopening: +10bp
The timing of the border reopening to tourists has been brought forward since February. The RBNZ previously assumed a slow recovery in tourism towards the end of this year.
Near-term GDP: -5bp
December quarter GDP was ahead of the RBNZ’s forecast (3.0% vs 2.3%). Some of the surprise will have been around higher potential output (Covid measures were less restrictive than expected) rather than stronger demand. March quarter GDP is shaping up to be weaker than the RBNZ’s February forecast of 1.6%, not just because there’s less remaining scope for a post-Delta rebound, but because the Omicron wave led to a weak patch in activity.
House prices: -20bp
House prices fell for the fifth month in a row in May, and are down about 5% from their peaks. While the RBNZ was already expecting house prices to fall as interest rates rose, the decline has been a bit faster than assumed.
World economy: -10bp
Forecasts of world growth have been revised down, reflecting the ongoing effects of the Russia-Ukraine conflict, China’s Covid lockdowns, and concerns about the effects that a worldwide monetary tightening could have on economic activity.
Terms of trade: 0bp
Export prices have unwound the gains made between the February and April reviews.
Exchange rate: 0bp
Similarly, the trade-weighted index has fallen back to around where it was in February.
Labour market: 0bp
The March quarter unemployment rate of 3.2% was in line with the RBNZ’s forecast. Wage growth was only marginally higher than expected.
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Total change: +20bp
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