RBNZ Steps Up Inflation Fight With Rate Hike

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(Bloomberg) — New Zealand’s central bank raised interest rates by half a percentage point for a second straight meeting and forecast further aggressive hikes to come to tame inflation.

The Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 2% from 1.5% Wednesday in Wellington, as expected by 19 of 22 economists in a Bloomberg survey. It projected the OCR will rise to at least 3.25% this year and peak at close to 4% in 2023, higher than previously forecast. 

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“It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment,” the RBNZ said. “The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1-3% target.” 

Today’s move keeps the RBNZ at the forefront of the global withdrawal of stimulus as policy makers try to prevent faster inflation becoming entrenched. It’s the first time New Zealand’s central bank has delivered consecutive 50 basis-point increases since the OCR was introduced in 1999, and takes its tightening since October to 175 basis points. 

The risk is that it applies the brakes too quickly and stalls the economy as high borrowing costs hammer the housing market and damp consumer spending.

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“The RBNZ doesn’t think it’s done with 50s yet, and was happy to signal that clearly today,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. She now expects another half-point move at the next review in July, but said the RBNZ will revert to quarter-point steps thereafter as economic momentum begins to falter.

The New Zealand dollar jumped more than half a US cent after the decision. It bought 65.05 cents at 4:30 p.m. in Wellington. Bond yields and swap rates rose.

Cash Rate Track

New forecasts published by the RBNZ in today’s Monetary Policy Statement show the cash rate peaking at 3.95% in the third quarter of 2023. In February, it forecast a peak of 3.35% in 2024. The new track shows the OCR starting to gradually decline from the second quarter of 2024.

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“The Committee agreed to continue to lift the OCR at pace to a level that will confidently bring consumer price inflation to within the target range,” the RBNZ said. “Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level.”    

Stable inflation expectations “will be a key indicator that the current monetary policy strategy is working,” it added.

Two-year ahead inflation expectations have risen to 3.29%, while five-year expectations have climbed to 2.42%. 

The central bank today projected inflation will slow to 3% in the second half of 2023 from a peak of 7% in the current quarter. Inflation is not seen returning to the 2% midpoint of the target band until 2025.

“The level of global economic activity is generating rising inflation pressures, exacerbated by ongoing supply disruptions driven by both Covid-19 persistence and the Russian invasion of Ukraine,” the RBNZ said. “The latter continues to cause very high prices for food and energy commodities.”  

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What Bloomberg Economics Says…

“The central bank is projecting a further, aggressive, 200 basis points of hikes by the second half of 2023. We see the RBNZ’s hiking cycle as likely to fall short, as global growth risks build.”

–James McIntyre, economist. For the full report, click here

Speaking at a news conference, Governor Adrian Orr said interest rates had reached a neutral level where there are no longer stimulating the economy.

“We would say that monetary conditions and financial conditions as a whole are now at least neutral if not tightening,” Orr said. “The actual interest rates that people receive are significantly above the OCR.”

There’s concern that the rapid rise in mortgage rates could tip the economy into a recession as consumers reduce spending, but Orr said the RBNZ is confident households will cope with higher borrowing costs.

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The bank projects annual average economic growth of 3.2% in the year through March 2023, then slowing to 1.3% in the following 12 months through March 2024. Previously it saw 2023-24 growth of 2.2%.

The RBNZ said there’s underlying strength in the New Zealand economy, supported by a strong labour market, sound household balance sheets, continued fiscal support and a strong terms of trade. However, it said headwinds are “strong.”

“A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment,” it said.

©2022 Bloomberg L.P.



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