MNI RBNZ WATCH: More Hikes Coming, 25bps An Option  For April

Reserve Bank of New Zealand Governor Adrian Orr hinted at the possibility of another downshift in the pace of tightening at the April meeting after hiking rates 50bps on Wednesday and acknowledging monetary policy was now contractionary.

The hike lifted the Official Cash Rate to a 14-year high of 4.75%, delivering a cumulative 450bp of tightening since October 2021, with the step down from the 75bp hike unveiled in November widely expected by markets given inflation had tracked below RBNZ forecasts and the jobs market had softened. The RBNZ considered a 50bp and 75bp hike, but the discussion was "heavily weighted" to 50bps said Assistant Governor Karen Silk. (See MNI RBNZ WATCH: 50bps Seen As Inflation Pressures, Jobs Ease)

The pace and sequencing of additional hikes came into sharp focus after the accompanying Monetary Policy Statement maintained a forecast for rates to peak at 5.5%, though the timing was pushed back to Q4 from Q3 in November's MPS. With another 75bp of prospective tightening in the pipeline, Orr said all options would be explored at coming meetings.

"25, 50, 75 point movements are on the table every time we come to talk, " Orr said at a press conference when quizzed about the prospect of stepping down the pace of tightening to 25bps.

"We have come a long way and fast with our official cash rate, and so now that we are confident we are in a restrictive position we are afforded more time to reflect on whether we're seeing the outcomes we were hoping to see by now. We're in a much more flexible position," he added. Overnight indexed swaps were largely unmoved after the decision, with around 35bps of tightening priced in for the April 5 meeting. (See STIR : Lack Of Movement In OIS As RBNZ Plays Relatively Straight Bat). OIS pricing points to a peak of 5.4% around the July meeting.

PRICES TO SPIKE

While the RBNZ said inflation remained high, the acknowledgement that inflation risks had "moderated somewhat" since the November meeting was reflected in a lower projected trajectory for the Consumers Price Index over the first two quarters of 2023. CPI rose 7.2% y/y in Q4, lower than the RBNZ forecast of 7.5% y/y.

Inflation was estimated to peak at 7.3% in Q1, down from 7.5% in the November MPS, and drop to 6.6% in Q2 compared to 6.9% in November. However, forecasts for 3Q and 4Q were revised higher. Inflation is forecast at 5.3% in Q4 compared to 5% in November's MPS. A return to the midpoint of the RBNZ's 1-3% inflation target is expected in Q4 2025.

Destruction wrought by Cyclone Gabrielle was expected to trigger short-term price spikes for goods like food and furnishings, but the RBNZ said it would look through these effects. The RBNZ warned that capacity constraints means recent storms could be more inflationary than previous natural disasters and it may take longer for recovery work to occur.

SHORTER RECESSION

The expected waning in inflation pressures will come at a cost of a shallow recession, with a 1.1% contraction in output over 2023.

However, the MPS forecast an earlier-than-previously-expected exit from recession, with three quarters of contraction forecast from Q2 rather than four quarters foreseen in November. Timing of the contraction, partly driven by a hit to consumption from higher rates and falling house prices, was viewed as "uncertain".

The combination of slower growth and rising supply was forecast to deliver a negative output gap of -1.6% of potential GDP in 2024, well down from the estimated positive output gap of 2.4% in 2022. Consumption is forecast to decline on a per capita basis to trough at slightly above pre-pandemic levels by mid-2024.