WELLINGTON — New Zealand’s central bank is likely to keep its foot hard on the stimulus pedal this week even as a surprisingly rapid recovery in the economy allows it to upgrade forecasts for activity and inflation.
In a Reuters poll, all 12 economists expect the Reserve Bank of New Zealand (RBNZ) to hold the official cash rate (OCR) at a record low of 0.25% on Wednesday, where it has been since a pandemic-driven cut in March of last year.
The central bank has repeatedly pledged to be “patient” on policy as it seeks to reach maximum employment and inflation in line with its target of 2%, something not achieved for almost a decade.
“No central bank wants to tighten policy prematurely,” says Kiwibank chief economist Jarrod Kerr.
“The difficult task for central banks over the last decade or more has been on how to generate sustainable inflation. Letting an economy run a little hot is justified.”
And the heat is rising, with unemployment falling to 4.7% in the March quarter two full years ahead of RBNZ projections. Prices for key commodity exports, notably dairy, have beaten expectations and a boom in the housing market has revived the building sector.
The improving economy has been a windfall for tax receipts allowing the center-left Labour government to launch a budget this month with extra spending, and still cut debt.
Inflation is expected to spike well above 2.0% this year, in part due to base effects as pandemic lockdowns last year drove consumer prices sharply lower.
Business costs have also been bubbling amid disruptions to global supply chains, though so far the RBNZ has argued these are transitory and the outlook for inflation remains uncertain.
“A ‘neutral’ unemployment rate is probably in the region of 4%; we’d need to get not just down to that level, but below it, before we would expect to see a substantial pickup in wage pressures,” argues Michael Gordon, acting chief economist for New Zealand at Westpac.
Indeed, Westpac does not expect a rate hike from the RBNZ until early 2024, though it assumes other unconventional policies, including bond buying, will end before then.
Financial markets are pricing in a first rate move as early as August 2022, though much depends on what other central banks are doing as the RBNZ could be reluctant to tighten alone and risk sending its dollar sharply higher. (Reporting by Wayne Cole; editing by Shri Navaratnam)