MNI RBNZ WATCH: 25bp Lift Expected, Peak Priced Lower

The Reserve Bank of New Zealand is expected to lift the official cash rate by at least 25bp from 4.75% at its April 5 meeting but could repeat February’s 50bp hike should it consider inflation – last recorded at 7.2% y/y – too far above its 1-3% target.

The market will also closely watch any change to the Reserve's peak rate forecast, following recent weaker economic data. In its last two statements, the RBNZ forecasted a 5.5% peak rate sometime in the middle of 2023, but overnight index swap rates now imply a cycle maximum of 5.26%, down from 5.5% expected at the start of March for the May 24 meeting. The OCR has not been 5% or above since December 2008.

OIS pricing also suggests a 25bp increase at Wednesday's meeting. The RBNZ believes 450bp in cumulative hikes are still working through the economy, but a weaker housing market, softer retail sales and their impact on GDP will likely weigh on its calculations.

February’s meeting recorded a step down from November 2022’s 75bp raise following the devastation wrought by Cyclone Gabrielle. The Reserve implemented 50bp hikes at every other meeting in 2022, switching from the 25bp increments used since its tightening cycle began in August 2021.

ECONOMIC HEADWINDS

About 50% of mortgages are expected to roll out of fixed-term rates into much higher variable products, lifting the average rate to 6% from 4.5%. Following February’s meeting, the Reserve warned borrowers could spend up to 22% of disposable income on servicing loans, a sharp rise from December 2022’s 9%. House prices are also feeling the pain, with a key house price index falling 14.2% y/y, or 12.3% excluding Auckland

Retail sales for Q4 2022 were also weaker than expected, declining 0.6% q/q – well short of expectations for a 0.2% rise. The numbers show households are tightening budgets as they battle price rises and see interest rates eat away more of their disposable income.

EXPECTATIONS REALISED

The fall in retail sales, which forced Q4 2022 GDP 0.6% q/q lower, was in line with the Reserve’s inflation fight (See: MNI INTERVIEW1:RBNZ's Conway Sees Progress In Cooling Spending). But RBNZ Chief Economist Paul Conway has warned a higher neutral rate was possible as global supply shocks deliver greater inflation (See: MNI INTERVIEW2: RBNZ's Conway Sees Era Of Economic Volatility).

Conway has also warned that it is not clear whether inflation expectations are falling fast enough for current and projected OCR settings to be consistent with positive real interest rates.