Market expectations for rate hikes this year have already eased a bit as the tension in the Middle East has subsided.<\/p>\n
This week, The Economy of Everything dives into the outlook for inflation and interest rates in the post-Iran war environment.<\/p>\n
\u201cWe were eyeing three hikes for the OCR this year. But that\u2019s come back a bit,\u201d NZ Herald Business Editor Tamsyn Parker said.<\/p>\n
Markets are pricing in a 75% chance of a hike at the next RBNZ meeting in July.<\/p>\n
That had gone close to 100% after the May monetary policy statement, she said.<\/p>\n
Where market pricing previously implied three hikes this year, now it suggests two and a half hikes.<\/p>\n
\u201cAfter that May meeting, they were right on the edge [of hiking],\u201d Dann said.<\/p>\n
\u201cIt took the Reserve Bank Governor\u2019s deciding vote to keep them on hold for now and everybody would have assumed that a July hike was a dead cert.\u201d<\/p>\n
But if inflation projections started to head lower than where the RBNZ has forecast them to track, that might cause the central bank to pause for thought.<\/p>\n
\u201cI don\u2019t think we can avoid hikes altogether,\u201d Liam Dann said.<\/p>\n
\u201cIt\u2019s a double-edged sword because if the economy responds well out of this crisis, you\u2019re going to see increased activity and economic growth.\u201d<\/p>\n
That would still be inflationary and require a monetary policy response, but for the right reasons.<\/p>\n
There have already been positive signs on the inflation front.<\/p>\n
The Stats NZ Selected Prices Index for May showed fuel prices were already falling before the latest deal was signed.<\/p>\n
Food prices were elevated, but largely due to strong export prices for dairy and meat.<\/p>\n
But overall, inflation was more subdued than many economists had feared it would be by this point.<\/p>\n
ANZ and Westpac economists have since downgraded their second-quarter Consumers Price Index (CPI) forecast from 1.8% to 1.5%.<\/p>\n
This would result in annual inflation coming in at 4.1% year on year, down from previous forecasts of 4.4%.<\/p>\n
ASB economists\u2019 central forecasts also have annual CPI inflation hitting 4.1% in the year to June and ending 2026 at around 3.6%.<\/p>\n
This is below the RBNZ\u2019s May Monetary Policy Statement forecasts.<\/p>\n
There was no more inflation data due before the next Monetary Policy Review on July 8, Parker said.<\/p>\n
That meant the RBNZ would have to watch oil prices and local petrol prices closely in the coming weeks.<\/p>\n
Listen to the full episode for the full conversation.<\/p>\n
The Economy of Everything is available on the iHeart app or wherever you get your podcasts.<\/p>\n
The series is hosted by Liam Dann, business editor-at-large and Tamsyn Parker, business editor for the NZ Herald. Thanks to CMC Markets.<\/p>\n
Listen to the full episode<\/a> for the full conversation.<\/p>\n