Interest Rate Increase on the Horizon
The latest ANZ Business Outlook Survey for January points to a clear shift in inflation dynamics, with firms signalling stronger confidence in their ability to lift prices as economic momentum builds.
ANZ chief economist Sharon Zollner said the bank’s base case remains for the first Official Cash Rate hike to occur in December this year. However, she warned that if businesses follow through on their stated pricing intentions and this shows up in official inflation data, the Reserve Bank of New Zealand could be forced to act sooner. From an investment standpoint, this introduces upside risk to interest rates at a relatively early stage of the economic recovery, with implications across asset classes.
The survey highlights a tension between strong activity and emerging inflation pressures. Business confidence eased from a 30-year high in December but remains elevated by historical standards. Expected own activity also dipped slightly yet continues to signal robust forward momentum. Measures of past activity, often viewed as a reliable proxy for GDP growth, suggest the economy ended last year strongly, raising the prospect of a solid fourth-quarter GDP outcome. For investors, this reinforces the view that cyclical sectors may continue to benefit from improving demand conditions, at least in the near term.
More concerning for monetary policymakers is the sharp lift in inflation indicators. The net proportion of firms expecting to raise prices over the next three months climbed to 57 per cent, the highest level since March 2023. Even more significant is the increase in the scale of expected price rises, which moved from 1.8 per cent to 2.1 per cent, the strongest reading in two years. Wage pressures are also edging higher, while inflation expectations have reached a 15-month high, suggesting that pricing power is becoming more entrenched.
For businesses, this environment presents both opportunity and risk. Improved confidence and activity support revenue growth, but higher wage and input costs threaten margins, particularly if demand weakens under tighter financial conditions. Companies with strong pricing power and operational leverage are likely to outperform, while those reliant on price-sensitive consumers may face headwinds as borrowing costs rise.
Investors should also consider the policy asymmetry highlighted by ANZ. While stronger inflation data could pull rate hikes forward, a meaningful slowdown in activity could quickly shift the balance back toward a more patient central bank. This creates a narrow path for markets, where incoming data will have an outsized impact on rate expectations, bond yields and currency movements.
Overall, the survey suggests the New Zealand economy has turned a corner, but with that recovery comes renewed inflation risk. For investors and corporate leaders alike, the coming months will be critical in determining whether growth can be sustained without triggering earlier and more aggressive monetary tightening.
