ANZ has become the latest bank to increase its prediction of the peak for the official cash rate (OCR).
It said it now expected the rate to peak at 5.75%, rather than 5.5% as previously predicted, which is also the Reserve Bank’s forecast peak.
The rate is currently 5.25%.
ANZ senior economist Miles Workman said the bank was picking a 25 basis point increase next week and another in July.
Data since the April review had been tilted to the upside overall, ANZ’s economists said.
While inflation had come in lower than expected, and inflation expectations had dropped, along with inflation in wages as measured by the Labour Cost Index (LCI), migration had boomed.
There were also signs that house prices were reaching a floor earlier than expected and mortgage rates were slipping.
The Reserve Bank was also likely to be wary of any stimulatory fiscal policy announced in the Budget.
“Immigration is storming,” they said in an update.
The Reserve Bank assumed net migration for the year would be 25,600 but that number had been reached in the first three months alone.
ANZ’s economists said that number could still turn out to be incorrect, the migration wave could peter out or more supply of labour could dampen wage pressure and hasten the turn of the labour market.
But migration could also add to demand in the housing market and boost demand pressures on the economy.
They said a pause in the OCR was unlikely next week because the data, on balance, made an increase warranted and the central bank had already indicated that was its plan.
“[A pause] would risk a slump in future OCR expectations and hence fixed mortgage rates at a time the housing market is turning upwards. We see the odds of a pause as around 5%.
“On the other hand, a 50 basis point hike could backfire in that it could see the market decide the Reserve Bank has definitely overdone it.”
That could mean markets priced in cuts more aggressively, removing the impact of the increase.
ANZ said, on the data alone, the Reserve Bank could justify a 6% peak but there were still downside risks.
Earlier in the week, Westpac said its pick was a 6% peak.
Chief economist Kelly Eckhold said the surge in migration had the potential to upset the Reserve Bank’s “grand plan”.
“More insurance is required to be sure of bringing inflation back into the target range. We see the OCR rising further to 6% by August and remaining there until mid- 2024 when it should be clearer that inflation pressures have substantially moderated. By then CPI inflation should hopefully be closer to 4% and falling.”
Gareth Kiernan, chief economist at Infometrics, said he still expected a 5.75% peak, as he had forecast previously.
“Although other forecasters seem to be playing catch-up with their picks, we’ve been a little bit reassured by recent data from the Reserve Bank’s survey of expectations showing two-year-ahead inflation expectations easing to their lowest level since September 2021 We think the bank is now getting close to the point where it needs to sit tight and let the effects of its rate rises to date work their way through the economy.”
He said migration flows presented a risk of boosting demand generally and for housing specifically.
“However, I don’t think they translate immediately through into more demand in the residential construction industry, given that activity has been disconnected from population growth over the last two years, with interest rate movements proving to be the predominant driver instead. Thus one of the most stretched parts of the economy is likely to be under less demand pressures over the next couple of years, no matter what.
“It’s also worth noting that stronger immigration is helping relieve some of the critical shortages in the labour market, which should start to moderate labour cost pressures within the next year, reducing the effects of a key driver of inflation.”
But he said if net migration continued at its current rate the inflow would reach more than 123,000 this year and the economy’s ability to meet that demand would be severely stretched.
The Reserve Bank would have to take further action to weaken the labour market and reduce the appeal for migrants.
“We saw the net migration boom in the early 2000s and lack of a coherent population or migration policy from the government cause similar demand-side issues and ultimately force interest rate rises by the Reserve Bank.”