The next move for the New Zealand official cash rate was likely to be up, but not until 2018, HSBC Australia-New Zealand chief economist Paul Bloxham said yesterday. As the Australian economy stalled, New Zealand’s economy had been growing strongly.
In New Zealand, population growth was strong, housing construction was rising rapidly, tourism was booming and dairy prices had spiked upwards, removing a key down-side risk to forecasts, he said.
However, for New Zealand policymakers, the challenge had not been growth but generating enough inflation.
Consumer Price Index inflation — the official measure — had been below the Reserve Bank of New Zealand’s "near 2%" target for the past five years.
As a result, the central bank had been worried low inflation would become embedded in inflation expectations, Mr Bloxham said.
"These concerns motivated the Reserve Bank to cut its cash rate by 0.75% in 2016 to 1.75%, despite strong growth and concerns about financial stability caused by a booming housing market."
Inflation was now starting to stabilise. The Reserve Bank’s preferred measures of underlying inflation had already steadied at about 1% to 1.5% year-on-year and some had shown a modest acceleration in recent quarters.
Construction-related price pressures and higher petrol prices should see CPI inflation lift during the next few quarters from a recent reading of 0.4% to 1.5% by early next year, he said.
At a deeper level, a factor holding down local inflation had been strong inward migration. That meant strong local labour demand had been met by ample labour supply and kept wage growth subdued. It was a factor helping explain why the famous "Phillips curve" trade-off between growth and inflation had not been working as usual.
HSBC modelling related to the Australian and New Zealand labour markets suggested inward migration was nearing its peak, Mr Bloxham said.
The New Zealand central bank was expected to hold its OCR throughout next year and Mr Bloxham expected the first 0.5% rate rise in 2018.
"Our recent shift in policy rate expectations for the US Federal Reserve and Reserve Bank of Australia mean the Reserve Bank of New Zealand should be able to lift its policy rate without unwanted upward pressure on the dollar."
