VIEW: Kiwibank Lift OCR Terminal Rate Call

Kiwibank “the RBNZ lifted the cash rate to 1% today, as widely expected. The remarkable resilience of the Kiwi economy means the extraordinary stimulus delivered to fight Covid is no longer warranted. “underlying economic strength remains in the economy, supported by aggregate household and business balance sheet strength, fiscal policy support, and continued strong export returns.” (RBNZ Feb MPS). We continue to expect the RBNZ to hike the cash rate at each meeting in 2022. We see the OCR at 2.50% by November. We have, however, added two more rate hikes to 3% in 2023 . The RBNZ has more work to do to rein in inflation and better balance the economy. The more aggressive approach is likely to accelerate the decline in house prices as interest rates are ratcheted higher, faster.”

• “The RBNZ is tightening policy, by taking interest rates ABOVE normal levels. Wholesale rates markets have factored in the higher rate path. And the wholesale funding costs for banks have risen sharply. Mortgage rates have risen in response, and we expect to see further hikes from here.”
• “The key line from the RBNZ’s statement said as much: “The Committee agreed that further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation.”
• "The OCR track shows the cash rate lifting, swiftly, to 3.3% by the end of 2023. According to the RBNZ, the current cash rate of 1% has at least another 230bps of hikes in the pipeline. A cash rate of ~2% is considered neutral (neither tight, nor loose). The OCR track implies the RBNZ will need to tighten policy well through neutral to contain the economy.”