December quarter inflation data beat expectations, fuelling concerns that interest rates might rise earlier than forecast.
ANZ predicts the first rate hike in December rather than February next year. Kiwibank economists maintain that no rate increase is warranted until next year.
Meanwhile, Infometrics chief executive Brad Olsen maintains his expectation of a rate increase in November.
“However, strong growth and inflation numbers in the next few months, combined with a possible hawkish approach from the new Reserve Bank governor, could force interest rate rises back on the table as soon as May,” Olsen said.
He said May marks the earliest plausible date, as February would be premature.
“But if you had a continued string of hot data, and I’m not saying that will necessarily happen – it’s not the current forecast – but if it did, conceivably the first time that the Reserve Bank would have enough information to make such a strong call would be in the May monetary policy statement.”
“The signal’s quite clear on the table that interest rates are likely to have to increase faster than people previously expected.”
“I still don’t think we’re yet in a position to go; we have to pull the trigger immediately, because I think there’s a little bit of danger in responding and reacting to every single individual number…”
“It’s more that, because we keep getting asked this question, we’re just wanting to provide a little bit of that context around what possible moves could there be in the system, but it’s certainly not the central view at the moment.”
Olsen noted that Infometrics had cautioned last year that dropping the OCR below 3% risked being the wrong call.
“Those interest rate cuts aren’t going to hit the economy until later this year. And so you could well find yourself having a slightly hotter economic activity, given that you’ve seen a few indicators pop a bit higher in recent times and slightly hotter inflation, and then you get some further interest rate cuts that continue to fall into the economy. That could be a potent cocktail.”
“Put it this way, we signalled that risk quite clearly last year. And like I say, we’re not there yet. But those numbers on Friday and more of the breadth of pressure did start to worry us a bit.”
He said data revealed essentials inflation at roughly 3.8% annually—above the long-term average of 3.2%.
Discretionary items are inflating at 1.8% annually—up slightly over recent quarters but matching the long-term average of 1.8%.
“Long story short, it is those essential costs that are hitting households a lot harder.”
He advised borrowers to stay alert to these trends and consider diversifying their risk more than usual.