RBNZ Review: Little changes from November

RBNZ Kept Its Inflation and OCR Forecast

The 50bp hike was widely expected so as the no change to major forecast. Some key takeaways:

• Strong but Slowing Domestic Demand: Strong domestic demand, led by household spending has been the pillar in 2022 but it is starting to show signs of slowing, along with weaker consumer sentiment and building activity.
  
• Service Industry Supported by Tourism: International Tourists have propped up the service industry since the reopening of borders. 
• High Inflation Requires more Hike: RBNZ recognized that inflation remains high and would be worsened by the recent storms across the North Island. Tight labors market will also build up inflationary pressure through wage increase. And thus, more tightening remain necessary to combat inflation.
  

OCR Projection Remains

Figure 1: November RBNZ OCR Projection

The OCR projections little changed from the November but minor curve smoothing around middle 2023. The terminal rate remains at 5.5%. The RBNZ is signalling they would remain committ4ed to their aggressive hike in Q1 2023 to tackle inflation. 

The strong domestic demand remains supported by higher wage attributed from historically tight labor market. The labor market remains in historical level and is expected to stay low for the coming quarters. Wage inflation is forecasted to continue accelerating in the coming quarter and will be closely watched by the RBNZ as it will slowly translate into inflation. However, as financial conditions tightens, business outlook has weakened, so as consumer spending outlook. The restraint in household budget brought by higher mortgage rates would put a cap on private consumption for NZ in 2023.

Elsewhere, while dmoestic demand may slow, the RBNZ is looking for more export in sight of the Chinese reopening at year end 2023, to bring more export on NZ commodities. Yet, the extreme weather in Q1 2023 may limit the gains as the economy in North Island is significantly disrupted.