Strong employment data has prompted ANZ economists to change their forecast for the Reserve Bank’s rate path this year. 

In bad news for mortgage holders, it is now forecasting 25 basis point hikes in both February and April, taking the OCR to 6 per cent - from its current level at 5.5 per cent. 

ANZ has pushed back its forecast for cuts from August to February 2025. 

Reserve Bank Governor Adrian Orr. Photo / File 

“The RBNZ warned in November that If inflation pressures were to be stronger than anticipated, the OCR would likely need to increase further,” ANZ chief economist Sharon Zollner said. 

“Data since then has been a series of small but pretty consistent surprises in that direction.” 

In the meantime, yields had fallen substantially as markets have continued to price in earlier rate cuts. The 2-year swap is now 70bp lower than its October 2023 peak, she said. 

On that basis two more OCR hikes would “only counter the 50 basis point increase in the long-run neutral OCR seen in the last two monetary policy statements,” she said. 

“Policy is ‘running to stand still’ in that context.” 

Zollner described the risks around the rates forecasts as “balanced”. 

ANZ chief economist Sharon Zollner says inflation needs to drop soon if we want to avoid more Reserve Bank interest rate rises. Photo / File 

“As we’ve stated, February is a line-ball call. If they don’t hike in February, we think they will in April, unless we start to see meaningful downside surprises. On the other hand, risks are tilted towards cuts coming earlier than February 2025, given we think restarting hiking will have pretty powerful shock value, as it’s been widely expected that rates have peaked,” she said. 

The RBNZ would be well aware that restarting hiking cycles when per capita GDP is down 3 per cent (year on year) might appear counterintuitive, Zollner said. 

“But at the end of the day, they have a job to do: to get inflation sustainably down to 2 per cent in the medium term. We just don’t think the RBNZ Committee will feel confident that they’ve done enough to meet their inflation mandate. The buck stops there.” 

On Wednesday new labour market data showed unemployment rose to four per cent in the December quarter - but the market had anticipated 4.3 per cent. 

Economists saw that as likely to be interpreted by the Reserve Bank as a sign that the economy is holding up better than expected and could increase pressure to hold interest rates at current levels for longer.