MNI RBNZ WATCH: 50bps Seen As Inflation Pressures, Jobs Ease

The Reserve Bank of New Zealand is expected to step down its tightening pace to 50bp amid better-than-expected price data and in the wake of Cyclone Gabrielle, although a hawkish tone will likely be maintained as inflation remains well above its 1-3% target.

Markets had leaned towards another 75bp rise since the RBNZ's last meeting in November, but the devastation wrought by Cyclone Gabrielle is viewed as firming the odds of a smaller hike, with overnight indexed swaps largely pricing in a 50bp increase to 4.75%. That would be the 10th consecutive hike and propel the Official Cash Rate to its highest since early 2009. (See MNI RBNZ WATCH: Another 125bp Coming; Brace For Recession)

A small number of economists expect a 75bp move, to underline the RBNZ's resolute stand on reining in elevated inflation, while one economist has argued for a pause due to the cyclone. (See VIEW: KiwiBank: The RBNZ Should Pause)

Wednesday's meeting will be accompanied by the latest Monetary Policy Statement, with the RBNZ's forecast peak rate to be in sharp focus as inflation, while still too high, has been lower than expected. The November MPS forecast a peak rate of 5.5%, but OIS pricing points to 5.25%.

While the RBNZ considered 75bps and 100bps at the November meeting, price pressures have not been as strong as predicted. The Consumer Price Index rose at a 7.2% y/y pace in Q4, falling shy of the RBNZ's 7.5% forecast. Non-tradables inflation, a gauge of domestic price pressures, printed at 6.6% y/y, steady on the prior quarter.

INFLATION EXPECTATIONS

The RBNZ's own measures of inflation expectations for Q1 were mixed. The two-year measure dropped to 3.3% from 3.62% in Q4, though the one-year measure edged up to 5.11% from 5.08%. It's worth remembering the November MPS featured research on the neutral rate, with the short term nominal neutral rate calculated as the real neutral rate - estimated at zero percent - plus an "approximation" of inflation expectations using an average of several measures of one- and two-year inflation expectations. This would suggest the current rate of 4.35% is contractionary.

The labour market appears to be no longer tightening. The unemployment rate rose to 3.4% in Q4 from 3.3% in Q3, while the under-utilisation rate climbed to 9.4% from 9.1%. Job ads have also fallen.

Cumulative tightening of 400bps since October 2021 continues to weigh on the housing market, with the Real Estate of New Zealand's Home Price Index falling 13.9% y/y in January. Consumer spending has been resilient, shown by the jump in credit card transactions in January, though consumer and business confidence has weakened. The RBNZ has forecast four quarters of contraction starting in the June quarter.

RBNZ Governor Adrian Orr will provide additional insight into the bank's thinking when he appears before a parliamentary committee on Thursday.