RBNZ hikes rates up by 50bps
As widely expected, the Reserve Bank of New Zealand’s monetary policy committee yesterday increased the official cash rate (OCR) by 50 basis points to 2 per cent and indicated that more tightening was on the cards.
The committee noted that it was resolute in its commitment to ensuring consumer price inflation returns to within the 1 to 3 per cent target range over the next two years.
ANZ New Zealand chief economist Sharon Zollner says the RBNZ’s statement was more aggressive than expected. It sees the OCR reaching just shy of 4 per cent by the second half of 2023, 65 basis points higher than in the February monetary policy statement (MPS), before declining back to around 3.5 per cent by mid-2025.
Zollner says the main focus for the market yesterday was whether July is likely to bring a 25 or 50 basis point hike.
“The RBNZ laid its cards on the table on that front, with an OCR track that implied a 50 basis point hike in July and probably August as well.”
Westpac New Zealand recently revised its OCR forecasts to include four consecutive 50 basis points rate hikes between April and August, on the way to a peak of 3.5 per cent by the end of this year.
Its acting chief economist Michael Gordon says: “The RBNZ’s projections effectively endorse this profile. Where we differ from the RBNZ’s view is in the need for the OCR to keep rising into 2023, by which time the main drivers behind inflation are likely to be looking much less ominous.”
ASB has adjusted its OCR forecasts to incorporate two further 50 basis points hikes in July and August (taking the OCR to 3.0 per cent). A further two 25 basis points hikes in the final two meetings of the year are expected to take the OCR to a peak of 3.5 per cent.
“We will adjust our broader economic forecasts to incorporate this new rate track,” says ASB senior economist Mike Jones.
“But it’s fair to say that the pace and degree of tightening will have consequences for house prices, spending and GDP growth such that we don’t think the OCR will need to be lifted all the way to the 3.95 per cent peak the RBNZ’s updated projections imply.
“We also expect demand to buckle a little sooner than the RBNZ, and thus have an easing cycle pencilled in from February 2024. The RBNZ also acknowledges the possibility of subsequent OCR cuts towards neutral levels from late 2024.”
Turning to the RBNZ’s comments, the MPS states: “Members discussed their ‘least regrets’ framework which in the current context amounted to the risk of tightening policy ‘too little, too late’ versus ‘too much, too soon’,”.
“The committee agreed that at present, with persistent cost pressures and rising inflation, the risk of moving too slowly and not far enough remained the most costly option.”
“On the risk of doing too much too soon, the Committee acknowledged that raising the OCR steeply puts pressure on some households’ spending decisions, especially those that are highly indebted.”
“The risks around not getting on top of inflation are real: the starting point for CPI inflation is nearly 7 per cent,” says Zollner.
“Inflation pressures couldn’t be more broad-based and the risks of a wage-price spiral were highlighted by a large upward revision to the RBNZ’s wage forecast. But the risks of an outright economic stall are real too, with consumer confidence outright recessionary, house prices falling, and growth in our largest trading partner under a lot of pressure.”
According to the MPS, members noted that, on average, household balance sheets are healthy and that house prices are expected to remain above their pre-pandemic level. The committee also noted that while higher interest rates will increase companies’ hurdle to investing, recent business surveys suggest labour shortages are the main constraint preventing an increase in production.