MNI INTERVIEW: RBNZ Doesn't Need To "Front End" Hikes

Clear forward guidance on official rates had seen commercial lenders "front load" their interest rate hikes and was a key reason why the Reserve Bank of New Zealand had opted for a 25-basis point rise after strongly considering 50-basis points at its last meeting, according to RBNZ chief economist Yuong Ha.

In an interview with MNI, Ha noted that NZ mortgage rates were at “4.5 to 5%, which is back to 2018 levels and much closer to where our sense of neutral rates is.”

“We feel a lot of the market pricing has been consistent with a much higher OCR, so we don’t have to front load,” he said.

There are diverse views on the path of rate hikes needed in New Zealand with the official rate track showing four more hikes of 25-basis points this year, but former senior RBNZ officials diverge on whether more and bigger are needed.

See: MNI INTERVIEW: Ex-RBNZ Chair Calls For 75bps Hike, Bond Sales.
See: MNI INTERVIEW: "Tailwind" Means Fewer RBNZ Hikes - Ex-Official.

FORECASTS

The RBNZ has reintroduced the publication of an “OCR track” for its Official Cash Rate in its quarterly Monetary Policy Statement, and last month outlined a track for rates to break through the 3% barrier next year before increasing to 3.4% by September 2024.

This forecast is significantly higher than the previous RBNZ Monetary Policy Statement, which had rates at 2.5% in September 2023 and only 2.6% by September 2024.

At the February meeting the bank hiked rates by 25% for the third consecutive meeting, bringing the OCR to 1%, see: MNI STATE OF PLAY: RBNZ Eyes Rate Hike Surge To Whip Inflation.

The RBNZ cut rates by 75 basis points in 2020 at the height of the pandemic and Ha said that while it may appear that the bank favoured “cutting in big lumps” and hiking gradually, it had been a “finely balanced decision” to hike by the smaller increment of 25-basis points in February given the risks in the inflation outlook.

RATES AND BOND SALES

The RBNZ also announced it would unwind its portfolio of NZD54 billion in Government bonds purchased under its Large-Scale Asset Purchase Program, and Ha said the central bank would sell these back to the NZ Debt Management Office at the rate of NZ$5 billion a year “in addition to any maturities.”

He said the RBNZ saw the OCR as the main monetary policy instrument and, because it was “trying to tip toe” as it unwound its bond holdings it would likely sell down from the longer end of the maturity curve “and work our way back.”

He said the RBNZ would soon give more details of its bond sale programme as it wanted to be transparent with the market.

On macro-economics, Ha said he expected the Russia-Ukraine conflict would add to inflationary pressure in the short term through impacting the oil price, and this could be an issue as NZ inflation is currently at a higher than forecast 5.9%.

One positive was that with NZ opening to the world after the pandemic migration could resume and this could alleviate capacity constraints in the labour market, with unemployment at a low 3.2%.