VIEW: TD: The “Stitch In Time” Hike

TD Securities note that “today's 50bp RBNZ hike is a clear indication that the Bank is intent on getting ahead of the inflation curve to "reduce the risks of rising inflation expectations".

• “The Bank's decision to hike 50bp was guided by Russia's invasion of Ukraine adding significantly to supply disruptions (international factors) and to existing capacity constraints and an already tight labour market (domestic factors).”
• “Indeed, as we highlighted in our change of call last week, the prospect that Q1'22 CPI prints with a 7 handle and the unemployment rate potentially drops below 3% in May implied the Bank's inflation forecasts from the Feb'22 MPS were looking outdated.”
• “While there are no official projections accompanying today's statement, the Bank was on the front foot, indicating that inflation in H1'22 would be around 7%, an upgrade from the 6.6% forecast in the Feb'22 MPS.”
• “While the Bank has acknowledged that financial conditions have tightened in NZ and that asset prices have moved lower, there is no sense of concern on the growth outlook. Even on house prices that have arguably dropped a little faster than the Bank was anticipating, it appears comfortable that record building activity should ultimately cushion the falls.”
• “In the end however, it's not the growth outlook driving the Bank's policy decisions, it's inflation outcomes. With little push back on market pricing and the Bank content with the 'stitch in time' approach to policy, we retain our forecast for the OCR to be lifted 50bp at the May meeting.”
• “With more aggressive action now to get the OCR to a neutral (2% OCR) setting sooner, this removes the need for the Bank to hike more aggressively later. This provides the RBNZ with policy optionality. While the Bank's Feb'22 OCR track pinned the terminal cash rate between 3.25-3.50%, we retain our call for 3% terminal rate to be reached at the end of this year.”