MNI STATE OF PLAY: RBNZ Considers Pace Of Rate Hikes

The Reserve Bank of New Zealand is expected to continue its tightening cycle at its meeting this week to take its official cash rate towards the forecast peak of 3.5% by September next year.

The OCR is currently at 1.5% after a series of rate rises which began in October, when the RBNZ began tightening from the record low of 0.25%, See: MNI STATE OF PLAY: RBNZ Speeds Up Policy On Inflation Concerns.

The RBNZ is expected to hike by either 25 or 50 basis points Wednesday to keep to the OCR track published in the last Monetary Policy Statement in February.

The bank will release an updated MPS, which will include an updated OCR track and give an indication of how the RBNZ is reading economic developments.

INFLATION

The central bank is responding to accelerating inflation, which reached 6.9% for the first quarter of 2022, a thirty year high. This was higher than the 6.6% forecast by the RBNZ, which has an inflation target of between 1% and 3%.

Already, however, there are signs that the economy is cooling. The NZ Treasury, which released forecasts in its budget update, has forecast inflation at 6.7% for 2022, but falling to 5.2% in 2023 and 3.6% in 2024. Rampant increases in house prices, which saw average gains around 25% over 2021, have reversed with the house price index falling in April.

AHEAD OF THE CURVE

The RBNZ has so far shown that it is prepared to be pre-emptive in its moves to put policy ahead of the curve, and the current issue is how fast the bank will move to get the OCR to its forecast peak.

In this cycle the RBNZ has opted for steep and early hikes, which has the market expecting a bigger hike of 50 basis points.