MNI RBNZ WATCH: Another 125bp Coming; Brace For Recession

The Reserve Bank of New Zealand's 75bp hike will help condemn the economy to a recession next year, with the central bank warning of another 125bps in tightening after revealing it had considered an even heftier 100bp increase at Wednesday's meeting.

Bucking the gathering trend among central banks towards a slower pace of hikes, the RBNZ ramped up its tightening campaign by lifting the Official Cash Rate for a ninth consecutive meeting to 4.25%, the highest level since early 2009, and raised its forecast for the OCR to peak at 5.5%. The 75bp hike was in line with market expectations. (See MNI RBNZ WATCH: 75bp On Table, Higher Peak Rate Seen)

Increases of between 50 and 100bps were discussed, but the need to get rates higher "sooner than previously indicated" sharpened focus on 75 or 100. The 75bp hike was viewed as "appropriate" given core inflation was "too high", employment beyond its maximum sustainable level, and inflation expectations had risen.

"I think it would be fair to say that the committee spent more time on 75 versus 100 than they did with 50 versus 75," Orr said at Wednesday's post-meeting press conference. He said the decision was "cognisant of how much we've put in the pipeline". The RBNZ has raised the OCR a cumulative 400bps since October 2021 in the fight to bring inflation back to its 1%-3% target.

The prospect of more aggressive hikes remains in play given Orr's desire to complete the tightening cycle in a timely manner. The OCR forecast contained in the Monetary Policy Statement released on Wednesday showed it peaking at 5.5% in the September quarter, well up from the 4.1% peak forecast in August's Statement. Markets reacted by pricing in a higher terminal rate. (See RBNZ : RBNZ Triggers Hawkish Repricing As It Looks To Fend Off Inflation)

"We've very eager to get to position we where can watch, worry and wait and feel confident that inflation will be worn down," Orr said. "We want to get there sooner, that's why you're seeing a steeper forward path for the Official Cash Rate."

The RBNZ next meets in February.

NEUTRAL RATES

Assistant Governor Karen Silk said the neutral level of the OCR had risen, saying rates were "not as contractionary as we had previously anticipated." The RBNZ estimates the real neutral OCR is "around" zero per cent and the long-run nominal neutral rate is "around" 2%, though the Statement noted that "our estimates suggest that this rate may be starting to increase slowly."

"That means actual interest rates need to increase further in order to do the work that we need them to do," Silk said. She said the transmission of higher rates to mortgages was being delayed as banks remained well funded, with 70% of debt funding sourced from low-yielding deposits.

RECESSION WARNING

New economic forecasts contained in the Statement offered grim reading, with Orr warning of a "shallow" recession that will deliver a 1% peak-to-trough contraction. "I'm not sugar-coating it, we need to slow spending," he said.

Inflation is now forecast to peak at 7.5% this quarter and Q1 2023, whereas the August statement forecast a peak of 6.4% in Q3 2022. "It's all about expectations" Orr said, noting that inflation expectations had risen. The September quarter Consumer Price Index increased at a 7.2% y/y pace.

Orr called on New Zealanders to lower their spending. "Demand is running faster than what economy can supply so that level of activity has to slow. It just can't keep growing at the growth rates we have seen recently," Orr said. "Think harder about your spending. Think about saving rather than consuming. Just cool the jets."