The Fight Against Inflation Is Far From Over. We Expect The RBNZ To Hike To 4.5%, Up From 4.0%.

• Kiwi inflation is now running at 7.2%, down a smidge from 7.3%. The rate of inflation is well above forecast. And the outlook for price pressure is one of prickly persistence. The rate of inflation may have peaked at 7.3%, but the slow downward glide-path will frustrate RBNZ officials. Today’s report will be like a red rag to an inflation fighting bull. Even more interest rate rises are likely.
• Imported inflation is cooling, but not as much as expected. Our domestically generated inflation, however, is heating up. Local prices rose from an annual rate of 6.3% to 6.6%. A step in the wrong direction.
• Stronger for longer inflation will force interest rates higher for longer than we had previously expected. We now expect the RBNZ to lift the OCR to 4.5%, up from our previous expectation of 4%. The higher interest rates go, however, the greater the risk of a hard landing. And the risks of a global recession are rising.

Here’s our take on current events.

Kiwi inflation is running hot. Price pressure far exceeds market expectations and interest rates will be forced higher in response. The headline rate of inflation eased a touch from 7.3% to 7.2%, after a stronger than expected 2.2% gain on the third quarter (Kiwibank 1.6%, consensus 1.5%). Inflation is running well above the RBNZ’s forecasts. Today’s report will be like a red rag to an inflation fighting bull. We have no choice but to expect a more aggressive RBNZ response. The CPI report was a shocker, to put it politely.

66% of items within the CPI basket rose – that’s very high. As expected, food and housing were the main contributors. But the report was much stronger than expected across the board.

At first glance, inflation emanating out of housing and construction continues to surprise on the high side. And we were surprised by the strength in imported inflation. Tradables inflation fell from 8.7% to 8.1%, although we were forecasting a fall to 7.1%. Prices in the transport category rose (we expected a fall) despite a decline in petrol prices, as airfares rose 20%.

Where to from here?.

The path for inflation looks to be downhill from here. Several indicators suggest that the pressure on global supply chains has eased materially in recent months. Global shipping costs have firmly turned south, and capacity is expanding with more ships being built. However, it’s a long way back to 2% with the Kiwi currency slowing the return. Due to a late start from the US Fed, and therefore relatively more aggressive tightening at present (as well as subdued risk sentiment), the USD has strengthened significantly. A weaker NZD however sets a roadblock for the descent in tradables (imported) inflation. It may take longer than expected, and hoped, for imported inflation to normalise.

The stickiness of non-tradables inflation also extends the journey back to a 2% inflation rate. We expect non-tradables (domestically generated) inflation to fall next quarter as the council rate increases would have washed through. However, domestic inflation pressure remains well supported by the surprising resilience of the economy. Our own spending data shows that household consumption is still holding up, despite the rising interest rate and high inflation environment. We are also yet to see the peak in wage growth. The labour market is expected to remain tight, especially as the net migration outflow deepens. Hiring intentions remain robust. And the only conclusion is rising wages.

More rate rises are required for mandates to be met. We expect another 100bps of hikes to come. Resilient demand and a weakening Kiwi dollar is frustrating the outlook for inflation.

The downside risks to economic growth however are mounting. The forward-looking indicators are showing a significant slowdown in growth. Both business and consumer confidence has been hit hard, and the housing market is in full retreat. The global outlook too is weakening.

A hard landing is likely, and it “will feel like a recession”.

The risks of a global recession are rising. The more central banks are forced to tighten, the more likely we are to see a recession. The IMF have recently revised their global growth forecasts lower, again. For 2023, global growth is forecast to be just 2.7%, with “many economies” facing recession. The sharp slowdown in global growth means the risks to financial stability are “exceptionally high”, and the worst is yet to come.

“The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next. The three largest economies, the United States, China, and the euro area will continue to stall. Overall, this year’s shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.” (IMF, October 2022)

The weakening global backdrop is particularly awkward for Australia and New Zealand. Our largest trading partner, China, is struggling. The zero-Covid policy is causing huge disruption. Chinese authorities continue to state that the war against Covid is “winnable” through strict lockdowns. Although at some stage the severe impact on economic activity might just force change. Furthermore, China’s property market crisis is causing contagion throughout the economy. House prices are falling in nearly three-quarters of China’s largest cities. China’s property market has helped fuel investment throughout the economy. No more.

New Zealand’s trading partner growth is slowing, quickly, and commodity prices are falling. New Zealand is a very small, open economy heavily influenced by global growth and developments in financial markets. The deterioration in the global growth outlook will only soften the outlook for Aotearoa.

© Scoop Media