VIEW: BNZ Look For A 25bp OCR Hike In Apr, 50bp Hike In May

Ahead of next week’s RBNZ meeting BNZ note that while they “understand the argument for a more aggressive tightening than previously postulated by the Bank, we can also see a strong counter-argument for a more cautious approach. When the RBNZ wrote its February statement it would not have counted on the Russian invasion of Ukraine evolving in the manner that it has. Nor, we believe, would it have foreseen the complete collapse in consumer confidence that has occurred under the perfect storm of Omicron’s rampant spread, a soaring cost of living (which is largely a function of offshore developments), the war, rising mortgage interest rates and falling house prices. Last but not least, China is looking a little shakier than might have been expected.”

• “Were the RBNZ to hike 50 basis points in April then we have little doubt the market would fully price a further 50 basis points for May and, most likely push the terminal rate through 4.0%. This has the potential to drive the household sector into much greater submission than might be considered optimal.”
• “While, realistically, it’s a coin toss as to which way the RBNZ leans, we think it would be better to keep its options open. A further 25 point nudge in the cash rate, accompanied by a stern warning that a more aggressive interest rate track will likely be forthcoming, when it releases its May Monetary Policy Statement, might be a better approach. This would largely keep the mortgage curve where the Reserve Bank wants it, allow the RBNZ to get public buy-in with stronger rate moves if uncertainty diminishes, while reducing the risk of throwing the economy quickly into recession if the adverse impacts of the war and Omicron multiply.”
• “We are cautiously optimistic that by May the worst of Omicron will be behind us and there might be greater clarity about how the economic impact of the Russia-Ukraine abomination might evolve… In addition, it will be useful for the Bank to see what the May 19 Budget delivers and the degree to which fiscal policy will be stimulatory or otherwise. We will also get confirmation of the Q1 CPI (April 21) and the latest set of labour market reports (May 4). The balance of risk is that the aforementioned data-flow will provide the necessary confirming evidence to allow the RBNZ to raise the cash rate 50 basis points at its May 25 MPS.”