MNI RBNZ WATCH: 75bp On Table, Higher Peak Rate Seen

The Reserve Bank of New Zealand will consider raising the intensity of its tightening campaign with a 75bp hike at its Nov 23 meeting as it struggles to rein in inflation, with policymakers set to unveil a higher forecast for the peak of interest rates in the accompanying Monetary Policy Statement.

Both 50bps and 75bps are on the table but the bias is towards a larger hike after inflation accelerated to 2.2% q/q in the third quarter. Inflation expectations have edged higher, the jobs market remains tight, and there is a three-month wait until the RBNZ's next meeting on Feb 23, 2023. Overnight indexed swaps have priced in around 66bp of tightening. (See AUDNZD : Fresh Multi-Month Lows)

The RBNZ will also unveil revised economic forecasts in its Monetary Policy Statement that will accompany the decision to raise the Official Cash Rate for a ninth consecutive meeting. A key revision will be the prospective trajectory of and peak for the OCR, which has closed in on the August MPS forecast of 4.1%. OIS pricing points to a peak rate of just above 5%.

The MPS is also expected to show a later return to the RBNZ's 1-3% inflation target range than the June 2024 forecast in the August MPS. Year-on-year inflation of 7.2% in the September quarter was well above the RBNZ's forecast for 6.4%.

TIGHTENING "AT PACE"

The Summary Record of the Oct 5 meeting, in which rates were raised 50bp to 3.5%, revealed members had considered 50bps and 75bps. The RBNZ is expected to repeat its hawkish language about tightening policy "at pace" given that inflation expectations have increased. The RBNZ's own measure of 2-year inflation expectations rose to 3.62% in the September quarter from 3.07% in Q2.

The tough call between 50bps and 75bps was reflected in the range of views expressed by New Zealand Institute of Economic Research shadow board, which includes former RBNZ chairman Arthur Grimes. The majority view called for a 75bp hike on Monday. However, three members preferred a smaller hike, with two highlighting the risk of recession if rates were raised by more than 50bp.

The case against a more hawkish 75bp hike rests on the weak housing market. Data from the Real Estate Institute of New Zealand showed house price fell 10.9% y/y in October - the largest decline in three decades. (See MNI BRIEF: NZ House Prices Post Biggest Fall In Three Decades). The RBNZ's latest Financial Stability Report warned of mortgage servicing difficulties as rates rise, with half the stock of fixed rate mortgages expected to reprice in 2022. (See MNI BRIEF: RBNZ Warns Of Mortgage Pain As Rates Rise)

A review of the RBNZ's policymaking over the past five years released earlier this month said its approach during the pandemic was "largely warranted" but that it should have tightened earlier in 2021 to head off inflation. (see MNI BRIEF: RBNZ Should Have Tightened Earlier - Bank Review). Governor Adrian Orr was reappointed to a five-year term earlier this month.