MNI RBNZ WATCH: 50 Basis Point Hike Despite Slowing Economy

The Reserve Bank of New Zealand shocked markets with a 50bp hike in the official cash rate – bringing it to 5.25% – despite a raft of recent economic data suggesting the country's economy is slowing.

The market had priced in a 25bp rise (See: MNI RBNZ WATCH: 25bp Lift Expected, Peak Priced Lower) and the higher move, which brought the OCR to a level not seen since 2008, saw the NZD overnight index swap rate reprice sharply. OIS now implies a peak at the May 24 meeting with a 25bp hike to 5.5%, up from the 5.3% level recorded prior to today, brining market expectations in line with the RBNZ’s February Monetary Policy Statement. The New Zealand dollar also firmed following the decision (See: Firmer, RBNZ Raises OCR 50bps).

While growth has been weaker than anticipated, demand was ahead of supply and there was no change to the Bank’s language on inflation, which it said was “still too high and persistent," according to the accompanying statement. Retail sales for Q4 2022 were weaker than expected leading up to the decision, declining 0.6% q/q – well short of expectations for a 0.2% rise, which forced Q4 2022 GDP 0.6% q/q lower, in line with the Reserve’s inflation fight.

WHOLESALE RATES

The RBNZ also noted the recent financial volatility had led to a fall in global wholesale interest rates, but widened credit spreads. “This reflects, to some degree, the potential for tighter global credit conditions and a weaker outlook for global demand,” the Bank said, while pointing out the strength of New Zealand’s banking system.

“Wholesale interest rates have fallen significantly since the February Statement, and this could put downward pressure on lending rates. As a result, a 50bp increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates."

WEATHER IN FOCUS

The Reserve also acknowledged recent weather conditions, including the recovery from Cyclone Gabrielle, fed more short-term inflation than assumed in February, increasing the risk expectations remain elevated above the bank's 1-3% target. "Looking ahead, the committee is expecting to see a continued slowing in domestic demand and a moderation in core inflation and inflation expectations. The extent of this moderation will determine the direction of future monetary policy."

The RBNZ will publish its next MPS, giving further insight into its peak rate forecast, after the May 24 interest-rate decision.