RBNZ hikes interest rates to 3%
As widely expected, the Reserve Bank of New Zealand took aim at continued high inflation by hiking the official cash rate (OCR) by 50 basis points to 3 per cent on Wednesday.
It now expects the OCR to peak at 4.1 per cent instead of 3.95 per cent as previously forecast.
It also believes that annual inflation peaked at 7.3 per cent in the June quarter, but does not expect it to return within the 1-3 per cent target range until the middle of 2024.
The RBNZ’s monetary policy committee anticipates that the rate of inflation will ease in the near term due to falling petrol prices and stabilisation in international shipping costs. But notes that inflation pressures have broadened and measures of core inflation have risen.
The RBNZ repeated its comments that “it remains appropriate to continue to tighten monetary conditions at pace”.
“This leaves the door open for further 50 basis point hikes at the October and November reviews, in line with our forecast,” says observes Michael Gordon, the acting chief economist at Westpac New Zealand.
“The RBNZ does not seem to buy into any signs of softening in the local economy, instead highlighting capacity constraints as the biggest restraint on growth,” he adds.
Gordon says Westpac NZ recently upgraded its OCR forecast to a peak of 4 per cent by the end of this year and the RBNZ’s statement is consistent with its forecast.
“However, we remain of the view that tightening is unlikely to continue into next year. We differ from the RBNZ in that we see early signs that higher interest rates are having the desired impact in terms of cooling domestic demand. We expect that that will become more evident to the RBNZ by the November review.”
Nick Tuffley, the chief economist at ASB, describes the details and forecasts in the monetary policy statement as pretty hawkish under the hood.
“A few details suggest the RBNZ has a greater propensity to keep hiking. The record of the meeting noted there was talk about whether or not to lift by more than 50 basis points, which flags where the RBNZ sees the risks around the OCR at the moment.
“Furthermore, the RBNZ is going to do more work on estimating the ‘neutral’ OCR, with the view that it is higher – and by implication that the OCR would need to get that much higher to be putting the brake on.”
Tuffley says ASB was looking for signs of added nervousness around the labour market, and those came through.
“All up it tips us towards a 4 per cent peak, though we are increasingly getting into the data-dependent part of the tightening cycle,” he says.
“Our view is for a further 50 basis point increase in October, then two 25 basis point moves over November and February. Those later two meetings are the fine-tuning part of the tightening cycle, so whether or not a final move to 4 per cent happens will be down to whether there is any tempering in the RBNZ’s inflation outlook over late 2022/early 2023. We still expect cuts from 2024.”