VIEW: Westpac View Still Differs To RBNZ From Early ‘23

Westpac note that “the Reserve Bank increased the OCR by 50 basis points to 2%. This was widely expected by forecasters and was fully priced by financial markets. The real interest was always going to be in the RBNZ’s projections for future OCR moves, and this proved to be more aggressive than we expected from them at this point.”

• “The RBNZ projects the OCR to reach a peak of close to 4% by the second half of next year, with most of those increases being front-loaded. That includes an implied OCR of 3.5% by the end of this year. This is a substantial upgrade to the OCR track compared to the 3.4% peak in the February MPS (and which was broadly endorsed in the April policy review). The RBNZ emphasised that this would be a temporary peak in the OCR, rather than a permanently higher level. The intention is to keep monetary policy ‘tight’ for long enough to bring demand and supply into better alignment, before returning interest rates to more sustainable long-term levels. The RBNZ expects inflation to remain elevated for a while, not returning to within the 1-3% target range until the end of 2023.”
• “Concern about inflation expectations, and the perceived need to reassert the 2% midpoint of the inflation target, have been an ongoing and escalating theme of recent RBNZ statements. We recently revised our OCR forecasts to include four consecutive 50bp rate hikes between April and August, on the way to a peak of 3.5% by the end of this year. The RBNZ’s projections effectively endorse this profile. Where we differ from the RBNZ’s view is in the need for the OCR to keep rising into 2023, by which time the main drivers behind inflation are likely to be looking much less ominous.”