The catastrophic effects of Cyclone Gabrielle has Infometrics believing that the Official Cash Rate (OCR) will have a 50-point increase instead of the planned 75-point increase. The damage and repairs after the extreme weather event look to cost well over $1 billion. Given the already heightened inflationary environment and current supply chain issues, additional pressures are bad news. The lower increase means the Reserve Bank is taking a cautious approach to the post-disaster environment, but it could also mean more rises in the future.
Recent economic data has seen electronic card spending drop by 2.4 percent, inflation sitting at 7.2 percent, a slight increase in the unemployment rate, and a two percent GDP growth for the last quarter. Even though inflation looks to have stabilised, it is still not between the Reserve Banks' one to three percent target band, and its underlying pressures still look tense. In a recent survey, business confidence was at an all-time low.
Combining all these factors means a cautious approach will likely be taken at the bank meeting on February 22nd as a recession is already underway.
“Inflation and the general resilience of demand across the economy have tended to surprise so much on the upside throughout the last two years. As a result, a 50-point increase in the OCR risks the Reserve Bank taking longer to bring inflation back within its one to three percent per annum target band. At this stage, there is little evidence that the economy is slowing and even less evidence that inflation has started to be brought under control. A 50-point move might not be enough to keep squeezing consumer demand or disrupting business behaviour, which has got stuck in a pattern of passing on cost increases and putting up their prices,” said Infometrics.
“However, in our view, the close call between a 50-point and a 75-point increase at next week’s Monetary Policy Review has been pushed towards the smaller lift by Cyclone Gabrielle. The full effects of the Bank’s interest rate rises to date have yet to be felt, and the cyclone has introduced another layer of uncertainty to near-term economic activity.”
