Sharon Zollner: ANZ Chief Economist comments on higher-than-expected inflation rates

An expectation the official cash rate will be held steady as inflation is higher than expected. 

Inflation's clocked in at 3.1 percent which means its snuck outside of the Reserve Bank's target band. 

ANZ Chief Economist Sharon Zollner says there's now quite wide agreement that the OCR will be held at 2.25 to prevent further inflation. 

She told Ryan Bridge that more extreme measures could be needed. 
 
Zollner says it's more likely than not that the Official Cash Rate will be hiked sometime this year. 

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Episode Transcript

Speaker 1 (00:00):
December quarter inflation. We got that number today, popped outside
the band at three point one percent usual suspects rates, insurance,
rent driving it. We were three percent September, remember two
point seven percent for June. So wrong direction for now.
Sharon zolna AM's in chief economists with me tonight' Sharon,
good evening. Hello, thanks dam me on, good to have
you on. So this means that, well, it's more than

(00:20):
what the Reserve Bank thought it was going to be.
Does this mean we're not going to get a cut,
we'll get a hold next month?

Speaker 2 (00:26):
Yeah? To be fair, I don't think anyone was expecting
as the Reserve Bank to do anything but hold. Since
there November montrepolicy statement, the activity data generally has been
coming out stronger than expected, and now we've got an
inflation starting point that's higher than they had expected as well.
But nonetheless they've only just finished cutting, So doing anything

(00:47):
other than nothing it would certainly be a huge spars
to everyone.

Speaker 1 (00:51):
And then you're now bringing forward an increase to September.

Speaker 2 (00:56):
Yes, So typically the OCR spends about a year at
the bottom or the top before it starts moving. Well.
Obviously every cycle is different, but essentially with that stronger
activity data and now the stronger inflation starting point as well.
You know, that's quite the combination, and so we now
think that rate hikes are likelier than not this year,

(01:18):
with obviously question marks around the timing. There are some
indicators suggesting that inflation is going to keep rising, in
which case rate hikes could come sooner. On the other hand,
descal headwinds for the economy. Rates and the exchange ratear
off their lows. Dairy prices have fallen quite a bit.
You know, the economy could lose one into the again,
in which case hikes could come later, but we're sort

(01:41):
of thinking sometime around the end of the year.

Speaker 1 (01:44):
The problem here is, well, it's more rates and insurance.
They just keep going up and they don't stop, do they.

Speaker 2 (01:51):
No, that is certainly true. Administered prices and those sort
of prices of Reserve Bank can't do anything about. We're
certainly a part of the story. But was notable about
this release was actually that the surprises were pretty broad
based no matter how you cut it. Generally speaking, it
was stronger than the Reserve Bank or was expecting. The

(02:12):
core inflation measures, sort of stripping out the noise they're
still in the target band. The Reserve Bank doesn't forecast though,
so we can't sure what they were expecting, but they
were they were pretty next And the non tradeable inflation,
which is the domestic part of inflation, heavily influenced by
things like wages that didn't fall. It was steady at

(02:33):
three and a half, which is a bit too high,
and whereas the Reserve Bank had been thinking it would
fall to three point two. So you can't just point
to a couple of technical things and say it's just noise.

Speaker 1 (02:43):
Stubborn, isn't it. When does it start to come down?
Like you know, because when the rates were dropped at
the end of last year, we were told they could
look through some short term, medium term increases in inflation.
Does this mean that we will come down again?

Speaker 2 (02:57):
Well, what is true is that the inflation data tells
you more about the past than about the future. It
tells you where you've been. On the other hand, three
point one does have a different ring to it than
three because the reserve banks target is one to three percent.
So that's awkward, I would say, But the outlook for
inflation really depends on how much spare capacity there is

(03:19):
in the economy, So the unemployment rate is a key
part of that, but machine sitting idle essentially, and how
much lung capacity have we got for a burst of speed,
And there's a huge amount of uncertainty around that, and
some indicators like our Business Outlooks survey are suggesting that
the Reserve Bank that's so that the economy might be

(03:40):
getting a bit puffed already, which isn't't a happy thought.
But essentially the Reserve Bank can't do anything about the
long term growth rate of the new Zeander economy. They
can just try and smooth it out essentially. So yeah,
there's a lot of uncertainty out there about how much
spare capacity is left in the economy. We've got labor
market data coming up pretty soon on the fourth of Debris,

(04:01):
I think it is that'll be probably more important for
the future track of interest rates than today's.

Speaker 1 (04:07):
Darter is Sharon appreciate that updates Sharon Zolner, who is
chief economist at am Z.

Speaker 2 (04:13):
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