23 May 2023

Budget spendup, migration may force Reserve Bank's hand, economists say

9:00 pm on 23 May 2023
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Pre-Budget, experts were picking the Reserve Bank would sit on the sidelines 'watching, waiting, and worrying' about the numbers. Photo: RNZ / Samuel Rillstone

The Reserve Bank's monetary policy statement on Wednesday has become a more close-run decision after a solid lift in government spending in the Budget and surging numbers of immigrants change the economic landscape.

A week or so ago, analysts were mostly talking of a 25-basis point rise, taking the official cash rate (OCR) to 5.5 percent, as inflation and the labour market, the RBNZ's two core worries, showed clear signs of cooling.

The consensus was then that the RBNZ, after some tough talking, would take a breather and sit on the sidelines 'watching, waiting, and worrying' about the numbers.

But ASB's chief economist Nick Tuffley said the RBNZ's challenges had increased.

"The impending RBNZ Monetary Policy Statement now looks more on a knife edge ... there are two added flies in the inflation ointment: Fiscal pressures and the uncertain inflation impact of migration."

He said the Budget, which was estimated to give a 1.7 percent shot in the arm for the economy, would be quite stimulatory when the RBNZ was still battling inflation.

Meanwhile, increased immigration was a double edged sword, helping to relieve labour shortages and putting downward pressure on wages, but at the same time stoking demand for goods and services.

"The orthodox thinking on migration is that overall it adds to inflation pressure ... Watch for whether the RBNZ sees migration as overall reducing inflation pressures - or boosting them," said Tuffley, who was picking a final 50 basis point rise.

Kiwibank chief executive Jarrod Kerr

Jarrod Kerr Photo: Supplied / Gino Demeer

Kiwibank chief economist Jarrod Kerr, who previously suggested the RBNZ did not need to raise the OCR as high as 5 percent, accepted the migration gains and Budget had changed the inflation equation.

But whether it was a 25 or 50 basis point increase was a secondary issue, he said.

"It's all about the forward guidance. And we will all ask the same question: Is 5.5 percent the peak in this cycle? It should be and we still believe it will be. But it's too early for the RBNZ to come to that conclusion - unfortunately."

He said the RBNZ would use its forecasts to send clear messages to financial markets, first by implying further rises in its future OCR track, and secondly by signalling in the same track no rate cuts before late 2024.

"Removing rate cuts is like delivering a rate hike. Wholesale rates will have a firmer floor, and may lift a little in response. Again, it's all about keeping retail lending rates at a level painful enough to reduce demand."

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