Kelly Eckhold: Westpac Chief Economist challenges the Reserve Bank's cuts to the Official Cash Rate

Another spike in inflation won't stop the Reserve Bank from cutting the Official Cash Rate again next month.

Stats NZ is providing its latest quarterly CPI update at 10.45.

Most economists expect it to hit the Reserve Bank's upper limit of three-percent, and some think it will surpass that limit.

But Westpac Chief Economist Kelly Eckhold told Mike Hosking the Reserve Bank still thinks the economy's weak enough to start pushing inflation down.

He says even the Reserve Bank probably won't be too bothered, even if inflation surpasses the three-percent limit.

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Episode Transcript

Speaker 1 (00:00):
Another of those fascinating economic days today with the release
of the Q three inflation read a couple of things
about it. Is it three or above? And number two?
Has it peaked? The last number we had for Q
two to June was two point seven. Kelly Echold, as
West Paxtief economist, of course, is back with us. Kelly morning,
he might what's you call?

Speaker 2 (00:18):
Well, we think it'll be a three percent annual eight
one percent for the quarter. That's more or less what
the Reserve Bank's got unless you go down to the
second decimal place. Key here is is this the peak?
As you pointed out.

Speaker 1 (00:31):
The psychological effect of anything with the three in it?
What's your assessment of that? Do we we're already in
a funk. Does this sort of sinkers?

Speaker 2 (00:40):
Well? I think people already know that the cost of
living has been rising quite significantly. I mean, a nice
little factoy there inflations back inside the target range. But
the level of prices is more than twenty percent high
than it doesn't start the pandemic, So people know that
they've got less money in the back pocket. The Reserve
Bank's kind of interested in do people think that they

(01:03):
need to get a bigger pay rise. Are their inflation
expectations going to rise? So far they seem pretty senguine
about that.

Speaker 1 (01:09):
See, this is the interesting thing for me, isn't it.

Speaker 2 (01:11):
So?

Speaker 1 (01:11):
So so we get to three three point one whatever
happens to be, and then we start talking about this,
but it's going to come back. What's the stuff that's
driving it? Though? How's that come back? Your council rates,
your insurance bills, your power bills, that they're going up
and continuing to go up.

Speaker 2 (01:27):
Yeah, Well, council rates is obviously the big bug bearer,
and that's going to be the big driver of the
CPI this quarter because it is the quarter where it hits.
The good news there is that the amount of rates
increase we've got in for this year is a little
bit lower than it has been in the last couple
of years. But I think you're right to point that.
You know, what we really need to see evidence here
is that a whole lot of the services sector prices

(01:49):
in the CPI start to come off a bit in
line with this weaker economy, and hence, you know, we're
really looking to see as their sides that core inflation
is dropping, which case that forecast that inflation heads. You know,
at least into the low twos again these few quarters
is going to be right.

Speaker 1 (02:07):
Yeah, So if the RB are expecting this, do they
look through it as much as they look through anything.
And if they were going to go twenty five, they're
still going to go twenty five. In other words, this
won't spook them.

Speaker 2 (02:16):
Well, I don't expect this to spook them because it's
in their forecast, even if it was a bit higher,
and if the reason was a temporary or one off factor,
I don't think they'll be that bothered because their key
message here is that they think there's enough excess capacity
in economy, which is another word of saying the economy
is weak enough that they can focus on that and

(02:37):
trust that that will bring things back. And you know,
the news we've got on the growth impulse in the
thirtain fourth quarters hasn't been that encouraging to be No.

Speaker 1 (02:46):
Indeed, not twenty five and done.

Speaker 2 (02:48):
Do you think, Well, I think they would like to
get everything done before Christmas. So I've been telling clients
that I think they'll be dicing up between twenty five
and fifty just to finish off for Christmas and then
hopefully net year, get the rates to where they are,
leave them there for as long as it takes. Hopefully
it's not very long, but we'll see.

Speaker 1 (03:07):
All right, Kelly, nice to talk to you. Appreciate it, Kelly,
you Cole, who's the WHISPAC chief economist.

Speaker 2 (03:11):
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