RBNZ Review: Peak Rates are Here

RBNZ Kept Its OCR Forecast and Revised 2023 Inflation Slightly Lower

The 25bp hike was widely expected so as the no change to major forecast. Some key takeaways:

• High Rates are here to Stay: "The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1-3% annual target range." 
• Labor Market Above Maximum Sustainable Level: There are signs of labour shortages easing and vacancies declining. It is expected the labor market has peaked and will soften in the coming months on tightening financial conditions.
• Headline Inflation Moderating but Core will be Sticky: Headline inflation is expected to continue to decline from its peak and so as inflation expectations. However, core inflation pressures will remain until capacity constraints ease further. Yet, as consumer spending growth slows, core inflation should show signs of moderation in the coming quarter.

OCR Projection Slightly Lower

Figure 1: May RBNZ OCR Projection

The OCR projections little changed from the February with a lower projection since 2025 by half a percent. The terminal rate remains at 5.5%. The RBNZ is signalling they would keep rates at a high level with the current projection of inflation returning to 3% target band in 2 years.. 

The strong domestic demand are beginning to show weakness as labor market peaked and inflationary pressure bits household balance sheet. The labor market remains in historical level and is expected to only drift lower for the coming quarters. Wage inflation is forecasted to continue its growth in the coming quarter. However, as financial conditions tightens, business outlook has weakened so as consumer spending outlook, the NZ economic growth would likely be slower along with inflation moderation. The restraint in household budget brought by higher mortgage rates had led to declining residential price but so as construction activities.

Elsewhere, while domestic demand may slow, the RBNZ is looking to tourism to bring in more spending and support demand. The repair and rebuild in North Island will further support economic activity, especially in the construction industry.