MNI STATE OF PLAY: RBNZ Seen Aiming Hikes For A Softer Landing

New Zealand’s central bank meets this week and is almost certain to deliver its fourth rate hike in as many meetings and with some observers expecting a hefty increase of 50 basis points.

The RBNZ has increased its Official Cash Rate by 25 points at every meeting since October, with the OCR now at 1.0%, and the last Monetary Policy Statement (MPS) in February including a track for the OCR which had rates at 3% next year, see: MNI INTERVIEW: Former RBNZ Official Calls For 50bps Hike.

The key issue this week is whether the bank should hike by another 25bps or deliver 50bps to address rapid inflation, which was at 5.9% to the end of 2021 and is expected to rise to over 7% in the months ahead.

NO REGRETS, MPS AHEAD

Under Governor Adrian Orr, the RBNZ had pursued a “no regrets” monetary policy last year, and this made for some deep cuts and an active program of Quantitative Easing when the economy demanded easier measures. The question for the market is if a similar swift-action approach is now required to control inflation as policy tightens.

The RBNZ usually times major policy moves with the release of an updated MPS, and the next one is due in May.

This would suggest that perhaps the bank will go for a smaller 25bps rise, but with prices well out of New Zealand's 1% to 3% inflation band target, calls to act tougher are growing.

HARD OR SOFT LANDING

There are already signs that the RBNZ’s tighter policy is gaining traction.

Commercial mortgage rates have increased to as high as 5% on some loans and last year’s rampant property market is cooling fast, with average price declines recorded for every month so far this year.

The Kiwi too has showed an upward, but not direct, trend since end January from levels around NZD65.48 to the USD to around NZD68.31 on Tuesday afternoon in Asia. A former senior RBNZ official said in January that a "tailwind" from higher mortgage rates and a stronger currency could mean that fewer hikes are needed.

That keeps the focus on a hard or soft landing as New Zealand’s economy cools down rapidly from the heat of 2021. The RBNZ’s goal will be to engineer a soft landing and that is likely to be at the forefront of discussion when the monetary policy committee meets on Wednesday.