Reserve Bank Set to Hike Rates Twice This Year

Global inflation pressures have forced a shift in policy expectations. The Reserve Bank is now projected to raise the Official Cash Rate by 50 basis points in 2024. This represents a change from previous forecasts that anticipated only a single rate increase.

Wholesale swap yields have jumped between 20 and 35 basis points over the past week. Market pricing currently reflects a 75 percent probability of two additional hikes. The peak rate for this cycle is now seen near 3.75 percent.

Inflation drivers shift policy stance

Several external factors are driving the renewed inflationary pressure. Global oil prices are rising as markets price out a quick resolution to Middle East conflicts. Ocean freight costs are increasing due to reported congestion at Asian ports.

A persistent global memory shortage continues to pressure information technology spending. Import costs are also rising generally because of a weakening New Zealand dollar. The trade-weighted New Zealand dollar hit 15-year lows this week.

These dynamics compress interest rate differentials relative to New Zealand. This has accelerated the repricing of local financial markets. The shift occurred rapidly within the last fortnight.

Local economic activity remains resilient

Domestic data has shown signs of momentum despite global headwinds. Manufacturing and services PMI indices have held in expansionary territory for three consecutive months. This is the first time this has occurred since 2023.

Tourism arrivals are on an upward trajectory. Chinese arrivals reached 97 percent of pre-pandemic levels in July. This compares to 57 percent in January of the same year.

Long-term migration numbers indicate a clearer uptrend. Annual net inflows rose to just over 20,000 in July. This is below the long-run average of 30,000 but shows increasing population growth.

Housing market faces mounting strain

Rising mortgage rates add drag to a housing market already under pressure. Weak labor market conditions and cautious consumer behavior contribute to this strain. The outlook for the sector is dimming as costs increase.