The Reserve Bank (RBNZ) could unexpectedly hike - or bring down - interest rates on Wednesday, a leading economist says.
But any such move would outstrip most forecasts, which expect the official cash rate (OCR) to remain at 5.5 percent.
"There's always a chance it could go in either direction. In fact, if you look at the first quarter inflation numbers - where non-tradeable inflation came in at 5.8 percent... you've got a recipe there for a hike," said Cameron Bagrie, an independent economist.
"Now, are they going to hike? No, because the economy in 2024 has very clearly walked into a brick wall - and the hope was that weak economy was going to accelerate the disinflationary process in the back half of 2024," he told AM.
The central bank has now held its OCR for nearly a year at 5.5 percent, following months of aggressive tightening.
On Wednesday, the market will be watching the RBNZ closely for "any hint in the language that they could be pivoting and interest rates will be coming down", Bagrie said.
But inflation had proven to be "a lot more persistent than anybody - including the Reserve Bank - thought", Bagrie added.
He said that put the RBNZ in an "awkward situation".
"They're relying on fiscal policy to be what's called 'tight' over the next two to three years," Bagrie said of the Government's upcoming Budget, due to be unveiled next week.
"That's about the Government taking more money out of our pockets than what they're pumping back into the economy - that's what happens when you go from deficit to surplus over time and that's one of those components of the disinflationary process the Reserve Bank needs to see flow through.
"What we know is the Budget's going to have... spending cuts, it also looks like we're going to see some tax relief, we'll be looking pretty closely in regard to what infrastructure spend looks like and we'll roll that into what's called the 'fiscal stance'; just how much money the Government's pumping in versus what they're taking out. The Reserve Bank is relying on the Government taking a fair bit out."
Inflation fell to 4 percent in the March quarter and was expected to continue dipping throughout the year, although domestic consumer prices remained stubbornly high.
Looser monetary policy was expected early next year - but fiscal policy was likely to remain tight.
"On one hand, you want to be helping the Reserve Bank and their disinflationary process... On the other hand, fiscal policy needs to be beyond the economic cycle and that needs to be more about big strategic things," Bagrie said of the Government.
"Fiscal policy also needs to sit back and take a little bit of a helicopter view in regard to, 'Look, where are we going over the next 10 years? And we all know about those infrastructure deficits - and they're massive."
Newshub.
