MNI STATE OF PLAY: RBNZ To Hike Key Rate, But By How Much?

A 25-basis point hike in the benchmark interest rate is likely at the Reserve Bank of New Zealand's Monetary Policy Committee review on Wednesday, although there is a view that the bank could lift by as much as 50 basis points.

The RBNZ raised official rates for the first time in seven years in October, taking the Official Cash Rate (OCR) from the record low 0.25% to 0.50%, and has moved into a tightening cycle with inflation gaining momentum and rampant house price gains now an economic, political and social issue.

The RBNZ will also release its latest Monetary Policy Statement tomorrow, which will include a likely track for the OCR next year which will act as forward guidance. The central bank is expected to continue to hike rates next year until they reach around 2%, considered by many to be the neutral setting in the current market, see:: MNI INTERVIEW: RBNZ "Shadow Board" Member Sees 25bps Rise.

STRONG ECONOMY, CURRENCY, PRICES

The RBNZ's hawkish outlook is a response to an overheated economy, fueled by accommodative monetary policy during the pandemic and strong fiscal stimulus.

NZ's interest rate path is prompting a spike in the currency, with the NZD now at 96 cents against the AUD and threatening to achieve rare parity as markets respond to different inflation outlooks.

Third quarter CPI inflation jumped higher to an annualized 4.9% in NZ and trimmed mean inflation, the RBNZ's key indicator, was not far behind in a range between 4.0% and 4.6%.

Unemployment was at 3.4% for the third quarter, the lowest in almost 15 years as COVID restrictions have slowed immigration and access to temporary workers, creating an acute labour shortage.

HOUSE PRICES A CONCERN

House prices surged 30% in the last year and have doubled inside seven years.

The RBNZ has responsibility for prudential policy, and on Tuesday asked for public feedback on debt serviceability restrictions (DSRs) on residential mortgage lending.

RBNZ Deputy Governor Geoff Bascand said that while there were no immediate plans to implement DSRs, the bank wanted to prepare for them "in case financial stability risks warrant it."

The RBNZ recently tightened loan-to-value (LVR) ratios for property loans.