Westpac: NZ central bank to hike rates this week: Puts RBNZ ahead of Australia and the US

  • By Elizabeth Fry

Westpac economist Michael Gordon expects the New Zealand central bank to lift the official cash rate by 25 basis points next week to reach one percent by the end of this year. 

Markets are pricing in some chance of a 50-basis point hike, but Gordon does not see this as the most likely outcome even though he agrees with the market’s assessment.  

"A 50 point move in one go would be very unusual but not unprecedented and the Reserve Bank of New Zealand has already shown itself to be an activist one, in both directions.  

"What the Monetary Policy Committee decides to do next week is ultimately a question of tactics; the economics alone won’t resolve the issue.” 

In his view, the RBNZ’s forecasts will show the cash rate needing to reach about 2 percent by mid-2023.  

"One way of looking at that is seven 25-point hikes throughout 13 policy review dates – not that big an ask.  

"In practice, rate hikes are likely to be front-loaded rather than spread out evenly, but that still doesn’t scream out for a 50 point move in one go." 

Ahead of RBA and US Fed 

Gordon said raising interest rates now would put the RBNZ ahead of its overseas peers by quite some margin - he expects the US Federal Reserve to hold off until late 2022, and the Reserve Bank of Australia until early 2023.  

Further, the economist said this reflects the unique circumstances that the RBNZ faces. 

“Eliminating the spread of Covid has allowed the domestic economy to build up a head of steam over the last year, and the ‘emergency’ monetary policy settings are no longer needed.  

“As Governor Orr reportedly said in a speech last month, this isn’t a conversation we’d be able to have in any other country.” 

Gordon said the market will ask how hiking rates now fits with the RBNZ’s self-declared ‘least regrets’ framework - which means doing everything possible to support New Zealand's economic recovery.  

Early this year, it meant waiting until it was certain that inflation and employment were on track before tightening. 

However, by July the central bank had concluded that the risk of waiting too long and letting inflation pressures get out of hand outweighed the risk of another Covid shock in the near term.  

“The challenge here is that ‘least regrets’ is subjective,” argued Gordon. 

“Waiting a few months would make little difference in terms of economic outcomes, but it would make a big difference in terms of our vaccination rate, and our ability to manage an outbreak of the more contagious Delta variant.” 

Gordon said if New Zealand were forced into another lockdown, there is nothing to stop the RBNZ from immediately reversing any hikes it had made.  

From where he sits, the economic cost of a brief period of higher interest rates would also be minimal; the ‘regret’ would largely be felt by the RBNZ itself, in terms of the cost to its reputation.  

“And the RBNZ has already indicated that it’s willing to take that risk.”