Goldman Sachs On RBNZ Rate Premium

The US Bank weighs in on the RBNZ rate premium, stating it isn't supported by fundamentals, but argues it may be sticky. It also doesn't expect a surprise RBNZ rate this week to spill over globally. See below for more details.

Goldman Sachs: "RBNZ hike premium not supported by fundamentals, but may prove sticky. Ahead of the RBNZ meeting next week, front-end rates are pricing ~17bp of rate hikes by May. Our economists expect the RBNZ to remain on hold until 2H this year, given core inflation is clearly on a downtrend, the labor market has softened (unemployment rate +80bp to 4.0% from its cycle low), and growth remains well below trend following a technical recession earlier in 2023. That said, wage growth—despite softening leading indicators—remains elevated and non-tradable inflation, which the RBNZ keenly focuses on, has been stickier than the bank’s expectations so far. Against this backdrop and the RBNZ’s revised Remit to solely focus on inflation (as opposed to the dual mandate), we think it is possible that Governor Orr leaves the door open to rate hikes for now in order to prevent financial conditions from preemptively easing. Absent further evidence on core services disinflation, this may mean the front-end risk premium for hikes proves somewhat sticky until the next quarterly CPI print in late April, even if we think hikes are fundamentally unjustified.

In the event the RBNZ does surprise the market with a hike next week, could this reopen the right tail (for further rate hikes) globally? We note that in the early stages of the global hiking cycle (in 2021-22 when RBNZ was leading the pack in terms of hawkishness), the front ends of small open economies exhibited stronger sensitivities to NZD rates. With signs of sticky inflation in some economies recently, while it is possible there are some global spillovers from a surprise RBNZ hike, we do not think those spillovers will persist for long. After all, the global inflation backdrop is fundamentally different today than 3 years ago, with a firm disinflationary trend across most economies, and the sticky rental inflation in NZ is somewhat idiosyncratic (related to its strong population growth). Several of the other smaller central banks have also clearly expressed the view that policy rates have already reached the top this cycle, if not on their way down."