Jarrod Kerr: Why the RBNZ should move away from its 'overly hawkish commentary'

Of Interest

Although the war on inflation is being won, there are still battles to come and it's too soon to expect Reserve Bank interest rate cuts, says Kiwibank Chief Economist Jarrod Kerr.

Speaking to interest.co.nz for the first 2024 episode of our Of Interest podcast, Kerr says the cost of living crisis is improving for households and businesses.

"We are winning the war on inflation but there are a few battles ahead and a few wins that we need over this year. We think inflation will fall to 3% quite quickly, but the move from 3% to 2% might be a bit awkward later this year and into next year," says Kerr.

On Wednesday Statistics New Zealand's latest Consumers Price Index (CPI) showed annual inflation down to 4.7% in the December quarter from 5.6% in the September quarter. Hot on the heels of the latest inflation data, Reserve Bank Chief Economist and Monetary Policy Committee member Paul Conway is due to give a speech next Tuesday. This will include comments on NZ data released since the central bank's last Monetary Policy Statement in November.

These will be the first public comments from a senior Reserve Bank figure this year.

"I think we have to have an acknowledgement [from Conway] that the overly hawkish commentary from November is no longer. When you look at what they told us in November, they basically told us they've got no tolerance for upside surprises. We've had nothing but downside surprises since that statement... The GDP report came out much weaker than what the central bank [expected]," Kerr says.

"They gave us a clear indication that if everything goes wrong to the upside that they will hike [the Official Cash Rate] again, and they gave us a 60% probability that they would hike again. I think that was wrong at the time and it has been proven wrong now. And I think Paul may hint that suggestions of another hike in this cycle have evaporated. But equally talk of rate cuts, I think they'll be coming out and say that's premature, that's a conversation for later in the year."

A key area of concern remaining for the Reserve Bank will be non-tradeable inflation, relating to inflation from domestic goods and services. This came in at an annual rate of 5.9% in the December quarter versus the Reserve Bank's 5.7% forecast. Kerr notes much of this is coming from housing related costs such as rents, helped higher by record net migration levels, insurance, and construction costs. In reality the Reserve Bank doesn't have a great deal of influence in the areas of insurance, rates and rents, Kerr says.

In the podcast he also talks about the next OCR review on February 28, whether the Reserve Bank's Monetary Policy Remit to; "achieve and maintain future annual inflation between 1% and 3% over the medium-term, with a focus on keeping future inflation near the 2% mid-point," may need to change in an era of climate change and other challenges, when he expects the Reserve Bank to cut the OCR, the US interest rate outlook, the outlook for the NZ dollar, the inflationary threat from Middle East conflict, and concerns about China.

*You can find all episodes of the Of Interest podcast here.