Soaring oil prices again!
• Inflationary pressures build further
• RBNZ will be getting nervous
• October QSBO of high importance
• Q2 GDP a positive growth surprise?
• Latest price data to confirm above target inflation
We were surprised that the RBNZ was, in its September Monetary Policy Statement (MPS), so aggressive in downplaying the possibility of the cash rate being hiked at both of this year’s remaining monetary policy meetings on October 28 and December 9. But it was adamant that, barring data surprises this would be the case. Moreover, its interest rate track clearly indicated the December meeting would be the most likely to deliver the singular increase.
Sizing Up Q2 GDP
• Q2 GDP still looks subdued
• Building, trade data offer support
• Upside risk to our current -0.2% q/q pick
• We wait for tomorrow’s data to have their say
• Revisions may alter GDP track
We have long thought Q2 GDP growth would be near flat before underlying expansion resumed in Q3. That remains the case as the quarter’s partial indicators have rolled in, noise and all.
RBNZ to steal the show
• Tightening, and then more
• GDP partials make an appearance
• Terms of trade turns down
• But dairy outlook positive
• Labour market turning
The RBNZ is centre stage. Expect a rate hike on Wednesday and promises of more to come. While this is where the excitement will be, also keep an eye on the flow of partial GDP data that we are about to be deluged with. It starts this week with Q2 trade data (Thursday) and real building work put in place (Friday).
September MPS Preview
• Cash rate to rise 25bp to 2.75%
• Market says done deal
• Signal of more to come
• RBNZ to signal peak approaching 3.5%
• We see upside risk to this
Our view of the path of interest rates has been unchanged for a long time and we see no reason to change now. In short, we believe the Reserve Bank will raise the cash rate 25 basis points at its upcoming meeting. It will signal the likelihood of further rate increases until such time that the cash rate is at, or above, neutral. But the specific rate path will be subject to the evolution of the economy and the accompanying data flow.
Growth and inflation
• PMI/PSI/ECT indicate growth
• Selected prices suggest CPI above RBNZ forecasts
• Inflation expectations mixed
• Monetary stimulus removal to continue
• Housing softness to be monitored
• GDT dairy auction, July trade data due
Last Friday’s July PMI revealed solid expansion in the manufacturing sector, while this morning’s PSI indicated that the service sector inched forward for the second consecutive month. Combined they indicate annual GDP growth of around 2% y/y. Today’s July Selected Prices suggest no reason for us to change our Q3 CPI forecast which remains above what the RBNZ projected in July.
More service sector jobs needed
• Housing market moribund
• Weighing on wealth
• Inflation expectations contained
• Is PMI strength sustainable?
• Services struggling to gain momentum
All eyes will be on this Friday’s Performance of Manufacturing Index and next Monday’s Services equivalent to see if recent momentum has been maintained. What’s happening to employment in the services sector will be a key marker for us. Thursday’s inflation expectations are expected to be benign. Meanwhile, the housing market continues to flounder.
Oil sways confidence, labour lags
• Businesses see growth ahead
• As inflation gauges ease a tad
• Indicators whipping around with oil prices
• Employment and unemployment seen higher in Q2
• El Nino strength increases spring/summer risks
We expect a small gain in employment in this week’s Q2 labour market data. While positive, we don’t think it will be enough to keep up with expected labour supply expansion such that the unemployment rate is seen edging higher. Private sector labour cost annual inflation is expected to be steady. Our forecasts are similar to the RBNZ’s and market consensus. Business and consumer confidence rose firmly in July. While sentiment appears sensitive to oil price fluctuations, improvement is consistent with strengthening economic growth ahead.
Oil volatility continues; labour market preview
• Same same: oil volatile, more US tariff changes
• Inflation at risk of lingering close to 4% through 2026
• Confidence lift tested by numerous events in July
• Employment indicators pointing up
• But insufficient to prevent unemployment rate rise?
Oil prices whippy. Our year-ahead inflation forecasts are broadly unchanged. We continue to see near-term inflation above the RBNZ’s July MPR estimates. June’s confidence improvement to be tested by numerous events through July. Modest employment growth in Q2 is expected to be slightly outpaced by labour supply such that the unemployment rate is seen edging higher.
More than oil to inflation and trade
• Annual inflation to jump well above RBNZ target band
• Fuel prices the main culprit
• Core inflation likely above target midpoint
• Bird flu detection represents another supply side risk
• More than oil driving merchandise imports
Annual inflation is expected to print well above the RBNZ’s target band when Q2 CPI figures are released tomorrow. Both our 4.1% forecast and market consensus 4.0% are a touch above the RBNZ’s July MPR forecast of 3.9%. Beyond the precise outcome, annual inflation looks sure to print materially above Q1’s 3.1% and, in doing so, well above the RBNZ’s policy target range. Our forecasts suggest the balance of core annual inflation measures are likely to remain above the midpoint of the RBNZ’s target range, albeit with a likely flavour of flat-to-a-touch-lower than last quarter.
Recovery evidence builds
• Combined manufacturing and services indices portend growth
• Hopes the QSBO provides good news
• Tourism and migration support the economy
• Rate increase not destabilising
• Lower inflation, higher spending power
Evidence continues to build that there is cause for optimism for the New Zealand economy. In last week’s Markets Outlook we listed a significant number of leading indicators that were pointing in the “right” direction and we said we hoped this would be followed up with positive reads on the here and now. This is exactly what has happened over the last seven days.
Signs of life
• Recovery indicators make an appearance
• Business confidence jumps
• So too the consumer equivalent
• Building permits on the up
• Net migration turns the corner
We published our preview of the July 8 Monetary Policy Review last week so we won’t repeat our thoughts in detail again. To summarise, however:
- We think the RBNZ raises the cash rate 25 basis points to 2.5% and signals a modest tightening bias.
- Inflation concerns are far from dead, so it makes no sense to maintain extremely stimulatory monetary policy.
- Nearly everyone concurs that rates will need to rise from here so why wait.
July 2026 MPR Preview
We are strongly of the view the cash rate needs to get back to neutral relatively quickly to ensure stimulatory monetary policy does not add to inflation. When the cash rate hits neutral then the RBNZ can ponder the nature of the inflationary pressure and determine what needs to be done next. At this stage we are keeping with our projection of further rate increases after July but, equally, it may be that the course of events dictates the Bank can stop tightening at a lower cash rate peak than we are currently expecting.