RBNZ urged to lift cash rate to 3% as oil and kiwi decline fuel inflation risks

The Shadow Board's conclusions bolster the case for an October rate rise, but a pause would not be unexpected given that some members still prefer to wait. A rate increase with a clear indication of a long hold could limit any rise in the New Zealand dollar, whereas holding with a hawkish message would keep alive the possibility of a hike by year-end. The main uncertainty is oil: the board members tied most of the inflation risk to energy prices and the Iran conflict, so further advances in crude would make more tightening more likely. The near-term trigger for New Zealand rate decisions is the upcoming inflation data.

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Earlier:

• Preview: RBNZ set to lift OCR to 3% ahead of election as oil and weak kiwi fuel inflation

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The decline in the kiwi and rising oil have swung most of the NZIER Shadow Board in favour of another RBNZ increase, even if a minority prefers to allow previous moves to take effect.

In summary:

• A majority of the NZIER Shadow Board wants a 25-basis-point increase at the RBNZ's October policy review, lifting the OCR from 2.75% to 3%.
• Board members point to new pressure from global energy costs and the kiwi's drop as heightening inflation threats.
• Several members argue for a pause to allow prior rate rises to feed through, noting a sluggish economy and weak job market.
• Over the next year, most expect the OCR to go up, with forecasts for twelve months out ranging from 3% to 4%.
• Some say further tightening must be guided by underlying inflation data, expectations and the recovery's speed.
• The next Shadow Board announcement is scheduled for 7 December, just before the RBNZ's Monetary Policy Statement.

The majority of the NZIER Monetary Policy Shadow Board advises the Reserve Bank of New Zealand to raise the Official Cash Rate by 25 basis points at its October review, bringing it to 3% from 2.75%. The independent panel says that rising global energy costs and the NZD's decline have increased the upside risks to inflation enough to justify action now.

The Shadow Board was not unanimous. Some members said the RBNZ should wait before tightening further in a still-soft economy with a cyclically weak job market. One chief economist from a bank argued for a slower pace of tightening because the medium-term outlook is stable and there are no signs of second-round price effects in business and consumer surveys, even though the short-term picture appears more risky.

The members favouring a hike cited pressures from oil price recovery, the falling kiwi, growth that has exceeded forecasts, and stubbornly high core inflation. One member said that even after adjusting for these shocks, inflation has not come back within the RBNZ's 1% to 3% target band on a sustainable basis. Another member said the decision was finely balanced but warned that the Iran conflict could make fuel costs less temporary than hoped.

Another opinion advised the RBNZ to hike now and then announce a lengthy pause, saying that certainty about the end of the tightening cycle would help business confidence more than keeping the risk of more increases alive.

Over a one-year horizon, most board members see the OCR climbing, with forecasts for the rate in twelve months from 3% to 4%. A few said the pace of further increases should be based on inflation trends, expectations, and economic recovery. Many flagged the impending inflation figures as crucial, and those numbers could decide if the bank acts now or delays until year-end, as observers largely anticipate.

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The NZIER is an independent research and consulting institute based in Wellington. Its Shadow Board comprises economists, academics and business leaders who convene before each RBNZ policy decision. The group prescribes what the bank ought to do, not what it will do. Members assign percentage probabilities to their preferred options, which the institute averages into a collective stance, so the outcome is a policy recommendation rather than a forecast or prediction. This month's recommendation for a hike does not mean the RBNZ will follow, as many analysts expect a hold until year-end. The exercise also aims to generate debate, test a board structure, and show how members can use probabilities to express uncertainty. The board operates independently of the RBNZ, and members speak for themselves, not their employers.