25bp Hike But RBNZ Moves To Neutral

The RBNZ hiked rates 25bp to 5.5%, its forecasted peak in the OCR, which was unchanged. The discussion shifted down a step to whether to hike 25bp or pause. In the vote that followed 5 chose the hike and 2 a pause. The statement focused on the slowing impact of restrictive policy and the transmission lags. The Committee also didn’t seem concerned by the near-term fiscal expansion or the increase in immigration. It now looks likely that the RBNZ will be on hold at its July 12 meeting.

• The RBNZ felt that both options wouldn’t be destabilising but it didn’t mention that further tightening is needed, consistent with its forecasts, just that policy will need to “remain at a restrictive level for the foreseeable future”. Thus, its stance seems to have moved to neutral while also quashing any expectations of near-term easing.
• The 2023 OCR forecasts have been revised up but the peak remains at 5.5% with the first easing in H2 2024. Rate cuts are now expected to be faster than assumed in February from H2 2025 with Q4 now at 4.1% from 4.3%.
• CPI inflation forecasts have been revised down in 2023 to 4.9% in Q4 while Q4 2024 is almost unchanged at 2.5%, thus signalling that the RBNZ isn’t concerned about the inflationary impact from rebuilding. 2025 is unchanged. It noted that while business’ inflation expectations are lower, households’ are higher, which it thinks is due to past inflation and could be adding to the “persistence of domestic inflationary pressure”.
• Restrictive policy is driving a slowdown in demand across sectors but spending will need to slow further to return inflation to target. The 2023 recession is still in the forecast but is shallower and 2024 growth has been revised up helped by rebuilding. The bank estimated that recovery from the flooding will add about 1.5% to GDP over a number of years. Upside risks from migration were seen as “mixed”.
• It noted that while the labour market remains very tight, there are indicators pointing to an easing in pressures helped by increased labour supply. But it did revise down its unemployment rate expectations across the forecast horizon.
• See statement here.