NEW ZEALAND BUSINESS NEWS
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Kiwi Economics, Kiwibank’s economics team, expects the Reserve Bank to raise the official cash rate at next week’s review and then signal it is done for a while. In a commentary on the global uncertainty facing the Reserve Bank, businesses and households, the team argues that a clear pause would let businesses plan and invest rather than wait for the next increase.
The Reserve Bank began with what the commentary calls a hawkish hike in July, followed by a dovish hike in September. The committee appeared to want to assess the damage from the two increases, and the looming election has dominated local headlines. The commentary says it looked as though the Reserve Bank wanted to take a rest next week before hiking again to end the year. Sticky inflation data has changed that view.
“Now that we’ve seen the inflation data, which is a little sticky, we prefer them to get it over and done with. They want 3%, so go to 3%. Hike next week, and we believe they will, and tell us that’s it for a while. Give us a prolonged pause. That will do more for business confidence than holding another hike over our heads for another quarter. Take the threat of hikes away, and help our risk takers take risk. Businesses want to ‘get on with it’,” the commentary says.
Inflation is running at 3.7%, which the commentary describes as better than expected. Strip out transport costs, and it sits at 2.7%, inside the Reserve Bank’s 1-3% target band. Even so, another bounce into the 4s is expected in the fourth quarter.
Oil prices have spiked back into unwanted territory, and the commentary notes it is tough to pass those costs on to hypersensitive consumers. Energy prices are a problem as inflation rises again while demand is being destroyed.
If the monetary policy committee believes the cash rate should move to neutral, roughly 3%, the commentary says it should take it there and leave it. “Put the car in neutral. And don’t tap the brakes. It’s time to provide some certainty in a world plagued by uncertainty,” it says.
Next week is a Monetary Policy Review rather than a full Statement, so it will be less detailed and won’t include updated forecasts. A simple hike paired with a hold message would ease the worry about rising interest rates among businesses and households. The commentary suggests such a combination could even ease wholesale rates a little.
Market pricing implies a hiking cycle to 4%, well above the Reserve Bank’s published track, which clearly aims to reach 3% and then 3.25% as we move into 2028. The commentary says the path thereafter needs reminding, and that a dovish hike which lifts the cash rate rather than expectations could pull wholesale rates closer to those previously published paths.
The weaker New Zealand dollar is playing a dual role. It helps the external sectors, and exporters are doing well, but it adds upward pressure on imported inflation.
Offsetting that, the commentary points to significant spare capacity in the New Zealand economy, which will moderate second-round price effects. A weak jobs market will continue to limit workers’ ability to negotiate higher pay, and a softening housing market is dampening demand elsewhere without much of a wealth effect.
Confidence has lifted among businesses. The commentary expected confidence to remain fragmented, with some business owners seemingly paralysed by the election, but in the last month it has heard from more and more owners with a positive mindset. The catchphrase is that they are getting on with it.
The commentary argues that the Reserve Bank should clear the way for those intentions to invest and hire to turn into action. It would prefer to let the economy recover, grow, and businesses adapt, but the threat of inflation broadening has prompted the Reserve Bank to act.
With 22bps priced in, or roughly a 90% chance, next week’s decision is odds on. The commentary argues that the message after the decision matters as much as the decision itself.
NZ Business News reports on the decisions, deals and numbers shaping New Zealand business — the companies making them, the policy and market conditions they work within, and what it means for the people running businesses here.