VIEW: ASB: RBNZ Comes Out Guns Blazing

ASB write “rather than taking a more cautious approach, the RBNZ keep up the cracking pace with a 50bp OCR increase. There was no relaxing of the language around inflation, with it deemed “still too high and persistent”.

• “The RBNZ acknowledged that recent growth has been weaker than expected. But it emphasised that demand is nonetheless running well ahead of supply, a reason for the hefty hike. Potential for more expansionary fiscal spending was on the RBNZ’s radar. And the recent flooding and cyclone recovery is now assumed to be more inflationary than the RBNZ’s initial estimates back in February. Furthermore, the RBNZ is worried that near-term spikes in inflation (as a result of the weather) will hold inflation expectations up, making the job of getting inflation under control more difficult. Another motivation for the large OCR increase was desire to prop up wholesale rates after recent falls, so as to stop bank lending rates from falling.”
• “We have pencilled in a final 25bp OCR increase to 5.50%, taking into account how staunch the RBNZ has been. However, we see a growing risk that demand is cooling relative to the economy’s supply capacity quicker than the RBNZ is currently estimating. If we see further signs of weak demand and easing capacity pressures, then the RBNZ may judge it has already done enough. The CPI, inflation expectations and labour market data will be very critical in the run-up to the May Monetary Policy Statement.£