A leading economist warns New Zealand's economy is not out of the woods despite optimism to start 2024, adding rate hikes could be a very real possibility.
There had been positive signs to start the new year with annual inflation falling to 4.7 percent in December, making it the first time since September 2021 annual inflation has been below 5 percent. But this is still above the Reserve Bank's (RBNZ) target of between 1 and 3 percent.
But Independent economist Cameron Bagrie was singing off a different song sheet when he joined AM on Tuesday morning.
Bagrie told AM despite there being a "fair bit of backslapping" to start 2024, the market has done a complete "somersault".
He says despite inflation slowly decreasing from its 2022 peak at 7.3 percent, which he described as "encouraging", the speed of the decline will have the RBNZ worried.
"If you look at your stock standard disinflation playbook, if you beat the economy up sufficiently you put it into recession and the New Zealand economy headed backwards in 2023 by a pretty reasonable margin. You should see inflation pressure disappear really quickly," he told AM co-host Melissa Chan-Green.
"Now what we're seeing is inflation is coming down but it's coming down at a particularly slow rate and that slow rate, while directionally encouraging, it's concerning to the Reserve Bank."
Bagrie told AM the longer inflation stays away from the RBNZ's target, the more likely people's expectations change.
"Those are views of where inflation is going to be two years, five years, ten years down the track, they're the epicentre of a central bank's credibility," Bagrie explained.
Bagrie said the Reserve Bank could have a battle on its hands as the two-year expectation for inflation is "stuck" at around 2.8 percent, the five-year expectation is 2.3 percent and the ten-year measure is 2.4 percent.
"So that stickiness of that two-year ahead number has become a bit of a problem. What we've also seen is the longer-term inflation measures, while they're still pretty low... 2.3 and 2.4 is not two and what we've seen is those numbers have started to creep up over the last three to six months," he said.
"Once again, this is the old sort of problem, the more you see inflation deviate or be away from your target for a period, the more people are going to start to second guess and think is 2 percent the right number anymore. If we start to see the markets second guess whether 2 percent is the right number, that's a real question of any central bank's credibility."
It was just over a month ago that both ANZ and BNZ were predicting that New Zealand would start seeing cuts to the official cash rate (OCR) around the third quarter of this year.
But Bagrie had a very different perspective when asked if he thought the market had changed.
"The market's done a complete somersault. There was a fair bit of backslapping at the end of 2023, the early part of 2024, that we've got rid of inflation. It's heading in the right direction globally and in New Zealand, interest rates are going to be coming down," he said.
He told AM there is currently a combination of strong domestic inflation, the unemployment rate slowly ticking up, wage inflation and people predicting New Zealand's economy is going to bounce back in 2024, which means the RBNZ will be discussing whether to hike the OCR not cut it.
"You throw that combination together and you got the recipe of the Reserve Bank going to be discussing whether the need to tweak or lift the official cash rate, push it up over the next few months, as opposed to pushing in an interest rate cut, which the market was perhaps hoping a little bit too much for."
The central bank has left the 5.5 percent official cash rate unchanged for its past five meetings, after tightening it 12 consecutive times before that.
New Zealand's economy came to a standstill in the second half of last year, surprising experts in the third quarter with -0.3 percent quarterly growth - driven by a slowdown in goods-producing industries.
Watch the full interview above.
