What stands out from the Reserve Bank’s economic forecasts yesterday is how different they are from those of Treasury’s scenarios produced just over four weeks ago, on April 23.
Treasury predicated those scenarios on a lowest oil price this year of $US110 a barrel.
But the Reserve Bank yesterday, in its Monetary Policy Statement, worked on the assumption that Dubai oil prices would fall to $US96 by the end of the year.
We have yet to see what number the Treasury chooses for today’s Budget Economic and Fiscal Update forecasts.
But the 12.7 per cent gap between the two forecasts, just over four weeks apart, suggests that we are not all that far off guesswork in current economic forecasts, and that will apply to the Budget as well.
That guesswork depends on being able to predict what President Trump is going to do in the Middle East.
The answer to that is simply “who knows!”
Adding to the uncertainty about current numbers is the fact that the Reserve Bank’s Monetary Policy Committee split in half yesterday as to whether to raise the Official Cash Rate.
That split was defined by the Bank’s employees, the Governor Anna Breman, the Chief Economist, Paul Conway and the Bank’s Assistant Governor (Money) Karen Silk.
Those who wanted to raise rates now were the three independent directors: economist and Executive Director of Capital Strategic Advisors, Carl Hansen; University of Auckland Professor of Macroeconomics, Prasanna Gai; and agribusiness economist Hayley Gourley.
The Bank’s record of the Committee meeting said it noted elevated uncertainty around its near-term inflation forecast.
“The forecast incorporates current oil futures pricing, which assumes Dubai oil prices fall to US$96 per barrel by the end of the year,” it said.
Annual headline inflation is expected to increase to a peak of 4.3 percent by the September 2026 quarter and to return to the target mid-point in mid-2027.
That was the view that prevailed at the meeting; that there was no need to raise rates now to curb inflation because with oil prices likely to fall soon, inflationary pressures would be less.
But Westpac Chief Economist Kelly Eckhold was not convinced.
“The other key factor is the progress of the war, which perhaps suggests this dovish group thinks that things might be resolved soon, allowing more room to wait,” he said.
“We think they will be disappointed there.”
But the Bank has taken its cue from the oil futures market. Last night, December prices for Dubai crude were $US81.60 for December deliveries, lower even than the Monetary Policy Statement expectation and much lower than the Treasury’s April forecast.
But all of this speculation depends on an assumption that the Strait of Hormuz will reopen to normal tanker traffic soon.
And whether and when that happens are the key elements in determining future Reserve Bank interest rate movements and in establishing the Government’s Budget fiscal projections today.
Finance Minister Nicola Willis, speaking in Parliament yesterday, reaffirmed her priority was to produce a fiscal surplus by 2028/29.
“We remain committed to putting debt on a downward path towards 40 percent of GDP, and to returning the books to surplus by the 2028-2029 fiscal year,” she said.
But in its Budget preview on May 12, the ANZ Bank thought achieving that would be unlikely.
“We are unlikely to see a forecast surplus over the Treasury’s horizon to June 30 2030 (noting that the December forecasts had the first OBEGALx surplus arriving in the 2030 fiscal year, but it was wafer thin at just 0.4% of GDP),” said ANZ economist Miles Workman in a Budget preview published a fortnight ago.
Just how uncertain things are is indicated in one of three alternative scenarios published by the Reserve Bank yesterday.
Its worst-case scenario has higher global oil prices and persistent pricing behaviour.
“In this scenario, the conflict lasts longer than assumed in the central projection and results in a more persistent disruption to global oil supply,” the Bank suggests.
“The price of Dubai oil rises to US$120 per barrel in mid-2026 and remains elevated for an extended period.
“Firms are assumed to respond to higher inflation by pre-emptively and opportunistically raising their prices in a coordinated manner, increasing the near-term indirect effects of the shock and making price pressures more persistent through stronger second-round price effects.
“CPI inflation rises to 5.8 percent. The OCR needs to increase quickly to offset persistent additional inflationary pressure, peaking at 4.3 percent.
“Higher prices and restrictive monetary policy result in a much weaker growth and employment outlook.”
Even that scenario is not as brutal as Treasury’s worst-case scenario, which is predicated on oil averaging $US180 a barrel.
So today’s Budget, more than any other we have seen in recent years, will be built on what are effectively shifting fiscal sands.
Those sands will shift with the price of oil.
And no one really knows what the price of oil will be later in the year because no one really knows what President Donald Trump is likely to do.
