NZ interest rates are more likely to head down, if anything, over the next 12 months, according to Harbour head of fixed income, Christian Hawkesby.
In an analysis published last week, Hawkesby says the Reserve Bank of New Zealand (RBNZ) may have to cut the official cash rate (OCR) below the current record low of 1.75 per cent to meet short-term growth and consumer price index (CPI) inflation targets
However, the RBNZ forecast NZ growth rate of 3-3.5 per cent over the next few years has “raised [the] eyebrows” of some observers, the Harbour paper says.
“But this is what is needed to raise non-tradeables inflation high enough to lift overall CPI inflation to target [of 2 per cent],” the paper says, with the RBNZ projecting GDP above “potential growth” over the next three years.
“In other words, the plan is to have the domestic economy running hot,” Hawkesby says in the analysis.
While the RBNZ appears “confident” of its forecast – based on technical readjustments, strong population growth and government stimulus packages (via Working for Families increases) – the Harbour paper questions whether the target growth rate can be sustained as banks tighten credit and a high NZ dollar puts the brakes on inflation,
“Furthermore, the current economic expansion is now eight years old, which by historic standards is quite mature, and when economic growth often tends to moderate rather than accelerate,” Hawkesby says in the paper. “An implication is that, all else equal, if GDP growth is only 2% over the coming period then the RBNZ may need to cut the OCR further to generate the domestic economic growth needed to lift inflation sustainably to target.”
But if the RBNZ, which is about to undergo a leadership change with the exit of governor Graeme Wheeler after the September 23 general election, resists the temptation to cut over the next 12 months, NZ interest rates could begin to ratchet up.
Under that scenario, “the most likely move in the OCR would be upwards”, the Harbour paper says, “as the amount of global spare capacity erodes and global inflation pressures finally emerge to arrest the deflation from tradeable goods”.