RBNZ to raise rates by at least 25bps on Wednesday
Westpac New Zealand expects the Reserve Bank of New Zealand to raise the official cash rate by at least another 25 basis points (bps) to 1.25 per cent on Wednesday.
“As in February, it’s likely to be a tough call between a 25 bp and a 50 bp hike,” says Michael Gordon, acting chief economist at Westpac New Zealand.
“That won’t be helped by the unusually light data flow between reviews. The data that we have had suggests that near-term inflation is a growing headache for businesses and households.”
Gordon says Westpac New Zealand is certainly not dismissing the case for a 50bp hike. “The trouble is that there’s been a relative paucity of data since the last review for the RBNZ to make a judgement on whether it’s on the right track or not,” he says.
“Moreover, the RBNZ has done little to shed a light on how it might view recent developments. In our view, the May monetary policy statement would provide a better opportunity to explain a change of tack, if it were deemed necessary.”
Not only will the RBNZ have the benefit of a full forecast round by the May monetary policy statement, but it will also have fresh reads on inflation (actual and expected), the labour market, two more months’ worth of housing data, and at least some notion of how the economy fared as the Omicron wave passed its peak, says Gordon.
He says the split of market opinion means that the RBNZ is probably going to rattle financial markets no matter what it does.
“The majority of economists are with us in predicting a 25bp hike, with a few picking a 50bp move. However, interest rate markets are priced more strongly in favour of a 50bp move (and are getting towards pricing in a peak OCR of 4 per cent of this cycle, which certainly would warrant faster action to reach that mark).”
Gordon believes a 25bp rate hike on Wednesday would disappoint the market. “Meanwhile, a 50bp move could prompt traders to price in 50bp moves at subsequent reviews as well, which would push longer-term interest rates even higher than they’ve gone already.”