Australia & New Zealand
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Australia & New Zealand

New Zealand

Omicron could add to inflationary pressure

If Omicron were able to evade existing vaccines, a renewed period of lockdowns would be required which would force the RBA to step up its bond purchases. Inflation would fall initially as crude oil prices would continue to weaken, but disruptions to transportation networks coupled with continued strength in goods demand would add to the upward pressure on goods prices. However, for now the activity data suggest that the economy is roaring to life after the recent lockdowns and we’re sticking to our above-consensus GDP forecast of 5% for next year.

3 December 2021

Diverging outlook for monetary policy

While the RBNZ has lifted interest rates by 50bp and signalled that as much as 200bp of tightening is still to come, the RBA’s central scenario remains that interest rates won’t be raised until 2024. While we have pencilled in the first RBA rate hike for early-2023, there are good reasons for the RBA to be more dovish. While New Zealand’s household savings rate was back at pre-virus levels just before the latest lockdown, it was still well above it in Australia. And while New Zealand has recently recorded a record trade deficit of 3% of GDP, Australia has recorded a record trade surplus of 5% of GDP. With New Zealand’s domestic demand overheating, it’s no surprise that most measures of core inflation are now at or above the top-end of the RBNZ’s inflation 1-3% target range, whereas underlying inflation in Australia has only recently climbed into the RBA’s 2-3% target range.

29 November 2021

Border reopening won’t ease labour shortages much

Australia’s government isn’t keen on opening the immigration floodgates once the border reopens to migrants next year and we still expect the unemployment rate to fall to 4% by 2023. Nor do we expect migration to ease labour shortages in New Zealand much next year. Nonetheless, New Zealand’s labour market is already very tight and with the RBNZ set to keep tightening monetary policy, we expect unemployment to creep higher over the next couple of years.

26 November 2021
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RBNZ will hike rates to 2.0% next year

While the RBNZ only hiked rates by 25bps at today’s meeting, it is set to continue lifting rates next year. However, we think a slowdown in the economy will end the Bank’s hiking cycle with the OCR at 2.0%.

Wage growth and inflation to continue to strengthen

RBA Governor Phillip Lowe doubled down on the view wage growth will remain too low to justify a rate hike anytime soon. But wages for workers on individual agreements is soaring. And we think wage growth for other workers will begin to catch up next year. We therefore reiterate our view that wage growth will approach 3% by the end of next year and that the RBA will hike rates in 2023.

RBNZ to accelerate hiking cycle

The New Zealand economy is clearly overheating. Measures of underlying inflation are mostly above the ceiling of the RBNZ’s target band. And employment is now above the Bank’s estimate of the maximum sustainable level. We therefore expect the RBNZ to ramp up its hiking cycle with a 50bp hike at its meeting on 24th November. And we now expect the Bank to hike rates all the way to 2.0% by the middle of next year.

Inflation will keep the RBA under pressure

Business purchase costs in the October NAB survey rose to their strongest level since 2008, consistent with trimmed mean inflation of nearly 1.5% q/q. That probably overstates the strength in underlying inflation in the months ahead as other measure of inflation in the survey were more subdued. While we do expect strong price growth to keep pressure on the RBA to tighten monetary policy, our view that wage growth will only approach 3% by the end of next year underpins our view that the Bank will hike later and less aggressively than financial markets expect.  

RBNZ set to hike by 50bp, RBA remains the archdove

The exceptional strength of New Zealand’s mean that we now think the RBNZ will hike rates by 50bps in November and by a further 100bps next year, which would take the OCR to 2.0%. That’s above the analyst consensus but less hawkish than market pricing as we still think falling house prices and higher debt servicing costs will weigh on consumption and dwellings investment next year. In Australia, the RBA’s persistently dovish stance has taken some of the wind out of financial markets’ sails. But we still believe that wage growth will pick up sooner than the Bank anticipates. That’s why we are sticking to our view that the RBA will first hike rates in early 2023, a year sooner than the Bank expects.

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