The Reserve Bank of New Zealand (RBNZ) is currently grappling with an uncertain environment, with inflationary pressures on one hand and a slowing economy on the other. In the opinion of economists at Westpac, the RBNZ’s determination to get ahead of inflation will likely see it deliver a 5.5% Official Cash Rate (OCR) peak by mid-year.
Westpac has revised its earlier forecast of a 5.25% OCR peak, noting that the RBNZ remains committed to bringing inflation back under control and sees the risks as being to the upside of its already-strong forecasts. The bank is also cognizant of the downside risks to activity in the years ahead, as higher mortgage rates squeeze households’ spending power.
In terms of the impact of Cyclone Gabrielle, the RBNZ is still assessing the scale of the impact. The cyclone is likely to add to medium-term inflation pressures at the margin, but the exact extent of the impact is still uncertain.
The RBNZ is currently in a difficult position, as it attempts to balance the competing forces of inflation and economic activity. It is clear that the bank is determined to get ahead of inflation, and this is likely to result in a 5.5% OCR peak by mid-year. However, the RBNZ is also mindful of the potential damage to economic activity that higher mortgage rates could cause.
In the short to medium term, the RBNZ will be closely monitoring the impact of Cyclone Gabrielle on the economy. While the cyclone is likely to add to inflationary pressures, the exact extent of the impact is still unclear.
Overall, the RBNZ is in a difficult position as it attempts to manage the competing forces of inflation and economic activity. It is committed to bringing inflation back under control, and this is likely to see it deliver a 5.5% OCR peak by mid-year. However, the bank is also mindful of the potential risks to economic activity, and will be closely monitoring the impact of Cyclone Gabrielle on the economy.
