MNI STATE OF PLAY: RBNZ To Hike As Growth Stalls

New Zealand’s central bank is expected to deliver another 50 basis point increase in interest rates this week as its tightening cycle continues, even though the national economy could be heading for a technical recession.

The expected 50bps hike would take the Reserve Bank of New Zealand’s Official Cash Rate to 2.5%, and would be the sixth interest rate rise in as many meetings since October last year, when the OCR was at the record low of 0.25%, (See: MNI INTERVIEW: RBNZ To Opt For "Short Term Pain" On Inflation).

The RBNZ, which attacked its mandate to deliver sustainable employment during the pandemic with accommodative monetary policy, is now attacking rising prices as it seeks to return inflation to its mandated 1% to 3% target range. First quarter inflation came in at 6.9% and is expected to have moved higher in the second quarter, (See: MNI STATE OF PLAY: RBNZ Wants 'Least Regrets" On Policy Views).

OCR TRACK

The RBNZ’s published track for the OCR in the last Monetary Policy Statement, published in May, forecast the OCR at 3.4% by the end of this year and gives guidance that any rate hike this week will be followed by more in the months to come. The next update on the OCR track will come in August.

Although NZ’s unemployment rate is at record low of 3.2% the economy is slowing, with growth shrinking by 0.2% in the first quarter and another fall likely in the second quarter, which would take the economy into recession.

CHALLENGE AHEAD

The RBNZ’s challenge is to engineer a soft landing while also bringing inflation lower and there are positive signs that this may be achieved. House prices, which soared by more than 20% over 2021 in the low interest rate environment, have declined 5.5% since November and avoided the crash which many feared.

With markets anticipating more big interest rate hikes in the U.S., the New Zealand dollar is unlikely to be a beneficiary of this week’s decision, which has been factored in by markets. The Kiwi, which touched USD0.70 cents a year ago, is down to USD0.61 cents and could potentially fall below the USD0.60 cents level in coming months.