MNI STATE OF PLAY: RBNZ To Continue Rate Hikes, Cld Outline QT

The Reserve Bank of New Zealand is expected to respond to an overheating economy with another interest rate rise as consumer price gains are pegged at 5.9% and unemployment is at a 30-year low and could also signal plans to unwind its balance sheet after purchasing more than NZD50 billion in government bonds.

The RBNZ meets for the first time this year on Wednesday and is expected to hike its Official Cash Rate by 25 basis points to 1.0% after similar rises at its previous two meetings though opinions differ greatly on the extent of tightening needed, see: MNI INTERVIEW: Ex-RBNZ Chair Calls For 75bps Hike, Bond Sales.

A 50bps increase in the OCR is also possible and the RBNZ is no stranger to big movements, cutting rates by 75bps in March 2020.

UPDATED FORECASTS

The central bank will also issue its quarterly Monetary Policy Statement which will include a forecast track for the OCR, which could show rates reaching 2.75% by the end of this year, around 50bps higher than earlier forecasts.

New Zealand’s economic recovery has exceeded RBNZ forecasts, with inflation now running significantly above the bank’s 1% to 3% target range.

House prices, which increased 27% last year according to analysts CoreLogic, have begun to fall as commercial banks raise mortgage rates and macroprudential controls on borrowers implemented by the RBNZ begin to have an impact.

The OCR went as low as 0.25% in March 2020 as the central bank responded to the pandemic crisis, and at one point the RBNZ asked commercial banks to prepare themselves for an OCR of zero or even negative rates.

The bank also embarked on its Large-Scale Asset Program of bond purchases in 2020 and now faces questions on how to manage its portfolio and if the sale of bonds will be used as part of its tightening policy.