MNI STATE OF PLAY: RBNZ Wants 'Least Regrets" On Policy Views

Reserve Bank of New Zealand Governor Adrian Orr says the central bank does not want “to have done too little too late” and this “least regrets” policy drove Wednesday's 50 basis point hike in the official cash rate to 2.0%.

“Inflation expectations are just continuously rising,” Orr told a press conference on Wednesday. “And the task of putting inflation back to within its range becomes incredibly costly. So that is why we have to risk doing too much too soon, rather than risk too little doing too little too late.”

KIWI GAINS

While the 50 basis point hike was expected by many, the RBNZ surprised in publishing a new track for the OCR in its updated Monetary Policy Statement which had the rate reaching 3.4% by the end of the year, significantly higher than the forecast of 2.2% from February’s MPS based on higher inflation forecasts, (See MNI BRIEF: RBNZ Sees Rates At 3.4% By December.)

The news sent the NZ dollar higher, up from 64 cents to 65 cents against the USD.

The OCR track now has rates peaking at 3.9% at the end of 2023 before falling to 3.7% by the end of 2024.

The RBNZ statement noted that global growth was slowing and inflation risks remained high and even though the NZ economy enjoyed underlying strength, “strong headwinds” remained. Rising global interest rates have also narrowed interest rate differentials with New Zealand, adding to downward pressure on the New Zealand dollar exchange rate.

INFLATION VIEWS

“The Committee noted that the lower New Zealand dollar raises import prices – exacerbating the effect of elevated global prices,” the statement said.

NZ inflation has surged to 6.9% in the first quarter of 2022, and today’s MPS forecast it would fall to 5.5% by the end of the year and to 2.6% by December 2023, back inside the RBNZ target of 1% to 3%.

Helping that along will be a 15% “peak to trough” fall in house prices, which surged around 25% on average in 2021 and helped fuel inflation.

The RBNZ has raised rates at every meeting since October, after cutting the OCR to a record low of 0.25% as it responded to the pandemic. The central bank is forecasting economic growth at 3.1% this year and 1.1% next year, both lower than February's forecasts.

The MPS includes forecasts for the NZ Dollar against the TWI, with no fluctuation from 71.8 for the forecast period out to March 2025 but higher than the previous MPS.