VIEW: Westpac Now Look For 50bp Hikes in May, July & August

Early on Tuesday Westpac noted that “many central banks have now realised that inflation pressures are not as transitory as they hoped, and that they will now need to move aggressively to catch up. The RBNZ at least has the advantage of having started the process earlier than many of its peers. But that’s only a marker of relative performance; the RBNZ will ultimately be judged on its response to New Zealand’s specific conditions.”

• “And despite a strong start, it seems that the RBNZ has erred in not following its own reasoning. In a speech last September, the RBNZ laid out a framework for when it would move the OCR in steady, gradual increments, and when it would step up the pace. The conditions for faster action were: that monetary settings were a long way from where they needed to be, that the risks to the economy were becoming skewed one way, and that there was a meaningful risk of not meeting its inflation and employment mandate over the medium term. All of those conditions had arguably been met by the time that speech was delivered. Yet the RBNZ then proceeded with cautious 25 basis point OCR hikes at the next three reviews, only stepping up the pace with a 50 basis point hike in April.”
• “Consequently, we think that the RBNZ’s focus over the coming months will be on making up lost ground. We expect further 50bp hikes at the upcoming reviews in May, July and August. We acknowledge that four in a row would be virtually unprecedented in the era of inflation targeting - but then, so is much of what central banks are facing today.”
• “We’ve also lifted our forecast of the peak OCR for this cycle from 3.0% to 3.5%. We expect that to be reached by the end of this year, with two more 25bp hikes at the October and November reviews.”
• “Our forecast is similar to the 3.4% peak in the RBNZ’s most recent published projections, but it’s still some way below financial market pricing, which has implied a peak of well over 4% at times. Obviously we think that market pricing is overdone - the high degree of leverage in the housing market means that a little will go a long way when it comes to raising interest rates. Even so, our forecasts agree that more will be needed than we thought a few months ago.”