Photo: RNZ
The Reserve Bank is expected to hold the official cash rate steady in this week's monetary policy statement as it assesses whether inflation is slowing as far and fast as it wants.
The RBNZ has gone "hell for leather" with 12 consecutive rate rises between October 2021 and May 2023, lifting the official cash rate (OCR) from a record low of 0.25 percent to a 14-year high of 5.5 percent.
But the central bank signalled in May it felt it had done enough to get inflation back into the 1-3 percent target band, and would adopt a "watch, worry, and wait" approach.
"On balance, things are turning out very much as the (Reserve) Bank has expected," BNZ head of research Stephen Toplis said.
He noted the labour market was showing signs of easing with a slight rise in unemployment, higher underutilisation, and slowing wage growth.
Similarly, inflation was also headed in the direction the RBNZ wanted, with the headline rate down to 6 percent, albeit with a few more complications, such as stubborn domestic price pressures.
Toplis said inflation might spike higher in the coming quarter after the end of the cut in government petrol taxes and the rise in global oil prices, which along with other domestic pressures, such as a possible turnaround in the housing market, would leave the RBNZ feeling uncomfortable.
However, on the other side of the inflation coin was a slowing local and global economy, falling commodity prices, the lagged effect of the rate rises with with close to half of household borrowers yet to shift to higher fixed rates.
"With all this going on, now would seem a completely inappropriate time to contemplate tightening."
One more to come?
Economists are unanimous in expecting no change this week, but ANZ and Westpac economists believed inflation would be stickier than expected and by year's end, another rate rise would be needed.
"We expect the RBNZ will see enough easing in inflation pressures to remain on hold and reiterate similar messages to July. But we see enough resilience to remain comfortable in our view that the next OCR move will be up," ANZ economists said.
Close attention will be paid to the RBNZ's accompanying economic forecasts, and most importantly the indicative track for the OCR.
"There shouldn't be much change in the OCR track which will probably still show an unchanged OCR until the September quarter of next year," Westpac chief economist Kelly Eckhold said.
But the upside and downside inflation risks were more pronounced, he said, which made rate cuts a possibility as early as May next year if the outlook deteriorates.
"On the upside, greater persistence in domestic inflation, stronger house prices, and a slower adjustment in the labour market would put the November statement tightening Westpac sees firmly on the table."