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ANZ economists change their call and now expect the Reserve Bank to lift the Official Cash Rate by 50 points next month, rather than the signalled 75 points; Kiwibank economists see peak OCR of 5% - 'enough is enough'


By David Hargreaves,

Annual inflation has remained at 7.2% in the December quarter, which is slightly higher than average forecasts, but there's evidence in the figures that the rate may be slowing.

Crucially, the domestically generated inflation, the so-called 'non-tradeable' inflation, remained unchanged also - at 6.6% against expectations that it would rise.

It's the domestic generation that the Reserve Bank can target with increases in the Official Cash Rate. The RBNZ had been forecasting a domestic inflation rate of 7% as of December and an overall rate of 7.5%. And based on these forecasts it had been pointing toward a further 75-point rise in the OCR when this is next review on February 22.

However, the actual figures released on Wednesday may well lead to increased market speculation that the RBNZ could and should now look at a lower increase - probably 50 points in the next review.

And right on cue, economists at the country's largest bank ANZ have changed their call and now pick just a 50 point rise (previously 75 points) next month and they now see the OCR hitting a peak of just 5.25% against their earlier forecast of 5.75%.

ANZ economist Finn Robinson and chief economist Sharon Zollner said inflation is still far beyond the RBNZ’s target band.

"But it is clear that overall inflation pressures are not as severe as the RBNZ feared at the time of the super-hawkish November Monetary Policy Statement, despite the additional domestic demand created by the revival of international tourism over the 2022-23 summer.

"Accordingly, the RBNZ now has the luxury of responding in the usual fashion to weakening activity data, reining in its hawkishness to some degree."

Kiwibank economists, who had previously questioned the need for the RBNZ to raise the OCR as high as it has signalled, were also quick to suggest that next month's OCR rise should be just a 50-pointer and with a peak of 5%.

"We are seeing the peak in inflation now. And the outlook for inflation, both offshore and onshore, is improving. The world war on inflation is being won," chief economist Jarrod Kerr said.

"We now expect the RBNZ to deliver a 50bp hike in February, a step back from the outsized (catch up style) 75bp signalled. We have seen more than enough to justify a reduction in the pace and extent of future rate rises. Enough is enough. A move to 5.5% is likely to be a step too far. We expect a move to 5%. Rates markets should react," he said

In terms of the nitty gritty, Stats NZ says inflation for the December 2022 quarter came in at 1.4%, giving an annual rate at the end of the year of 7.2%. The annual rate is unchanged from the September quarter.

The annual rate compares with an average market expectation of 7.1%, although there was quite a disparity between economists' picks on this occasion, highlighting the current volatility. Previously, the annual inflation rate hit a 32-year high of 7.3% for the June quarter of 2022 before dropping oh, so slightly to 7.2% as at the September quarter.

As said further up the article, the RBNZ, which is driving up interest rates to try to get inflation back somewhere near its 1%-3% target range, had picked 7.5% and had signalled the likelihood of another 75-point rise to the Official Cash Rate at the next review on February 22 - which would match the 75-point rise at the last review in November that took the OCR up to 4.25%. The RBNZ's indicated the OCR may peak at 5.5% in the middle of this year.

Stats NZ said non-tradeable inflation was 6.6% (unchanged from September) in the 12 months to December 2022 driven by higher prices for the construction of a new house.

Tradeable inflation was 8.2% (up from 8.1% in September), driven by higher prices for international airfares.

Non-tradeable inflation measures goods and services that do not face foreign competition, and is an indicator of domestic demand and supply conditions. However, the inputs of these goods and services can be influenced by foreign competition.

In terms of the overall inflation figures Stats NZ said housing and household utilities was the largest contributor to the December 2022 annual inflation rate. This was due to rising prices for both constructing and renting housing.

Prices for building a new house increased 14% in the 12 months to December 2022, following a 17% increase in the 12 months to September.

“Respondents reported more expensive materials and higher labour costs are driving the increase of building a new home,” Stats NZ consumer prices senior manager Nicola Growden said.

The increases in costs of building a new house are gradually starting to slow, however. Earlier in 2022 the annual rate of increase was running at over 18%.

This story was originally published on and has been republished here with permission.