MNI STATE OF PLAY: RBNZ Hikes 50bp, No Slowing Down in 2022

The Reserve Bank of New Zealand considered a 75bp hike at its October meeting, signalling its determination to sustain the pace of monetary tightening this year as it lifted rates 50bps to 3.5% as expected on Wednesday.

It was the eighth consecutive hike by the RBNZ since Oct 2021, delivering a cumulative 325bps of tightening and lifting the Official Cash Rate to its highest level since early 2015. The hawkish slant to the decision led to a modest repricing of the Bank's likely terminal rate, which is forecast to be around 4.5% by mid-2023. Another 50bp - possibly the final hike of that size - is priced in for when the Bank gathers for its final meeting this year on November 23, when it will also release its Monetary Policy Statement.

The RBNZ said it was "appropriate" to continue tightening monetary policy "at pace", describing core consumer price inflation as being "too high" and labour resources as "scarce" in a decision that was inline with expectations. (See MNI STATE OF PLAY: RBNZ To Hike 50bps, Still Has work To Do)

But the revelation in the Summary Record of Meeting that the committee had considered a 75bp hike dashed any thoughts that the RBNZ may be set to follow the lead of the Reserve Bank of Australia and slow its pace of tightening. The RBA surprised on Tuesday with a smaller-than-expected 25bp hike to 2.6%. (See MNI STATE OF PLAY: RBA Taps Brakes, Sees Slower Pace Of Hikes).

Some members argued a larger increase in the OCR would reduce the likelihood of a higher terminal rate. Other members "emphasised" the degree of policy tightening delivered, while some members noted the lag in monetary policy transmission and slow pass-through to retail interest rates.

INFLATION TOP PRIORITY

Inflation remains top priority for the RBNZ. It said inflation is "currently too high" and noted core measures in some countries had risen and "persist." Members said monetary conditions "needed to continue to tighten" to bring inflation back to its 1-3% target range, underscoring its "resolute" commitment to reining in price pressures.

The NZ dollar, which recently fell to its lowest level against the U.S. dollar since 2009, was viewed as posing "further upside risk" to inflation over the forecast horizon. The kiwi rallied after the rates decision.

The RBNZ noted that recent indicators suggested domestic economic activity in the September quarter "may have been slightly stronger than previously assumed." Consumption and household balance sheets were both viewed as "resilient". The labour market was assessed as "very tight" and members discussed the likelihood of further "upside wage pressures."

It said the global growth outlook had "weakened", noting risks to growth and inflation from the war in Ukraine. The Bank noted financial stresses emanating from China's property sector.

Key data that will feed into the RBNZ's November meeting will be the release of the third-quarter consumer price index on Oct 18 and third-quarter labour market statistics on Nov 2.