MNI BRIEF: RBNZ Peak Rate In Focus After Weak Q4 GDP

The Reserve Bank of New Zealand's peak rate forecast will be tested after Q4 GDP printed lower than expected and well below the central bank's forecast on Thursday.

New Zealand's economy contracted 0.6% q/q in Q4 according to StatsNZ, well below market expectations for a 0.2% q/q contraction and the RBNZ's forecast for a 0.7% q/q expansion outlined in February's Monetary Policy Statement. The RBNZ had forecast a three quarter recession to start in Q2. Growth slowed to a 2.2% y/y pace, down from 6.4% y/y in Q3, highlighting the impact of the RBNZ's cumulative 450bp of tightening.

The GDP decline was driven by 1.9% q/q contraction in retail trade and manufacturing. Primary industries contracted 1.3% q/q and healthcare contracted 1.2% q/q. The risk of a lower-than-expected Q4 print was highlighted in MNI's recent interview with RBNZ chief economist Paul Conway. (See MNI INTERVIEW1: RBNZ's Conway Sees Progress In Cooling Spending).

The RBNZ is likely to raise rates 25bp at its April 5 given inflation remains well above its 1-3% inflation target. Overnight indexed swaps have not fully priced in a 25bp hike for the meeting, with 4.88% priced in compared to just over 5% on Monday. The RBNZ had forecast a peak rate of 5.5% but OIS pricing points to a peak rate of around 5.15% in July.