The RBNZ's rate hiking cycle has been longer and larger than its counterpart in Australia, and likely more economically devastating.
Video / NZ Herald
Economists are picking the Reserve Bank will opt for the middle path tomorrow and lift the official cash rate by 25 basis points - taking it to 5 per cent.
There is widespread agreement that there will be a pullback from the 50 basis point hike that was forecast afterthe last Monetary Policy Statement in February - and that the peak for rate hikes will now be 5.25 per cent, rather than the 5.5 per cent previously expected.
Since February we have seen data showing local GDP slumped in the December quarter and global banking meltdowns and international turmoil shifting the market outlook for the rate path.
This week’s decision is a briefer Monetary Policy Review, as opposed to a full Monetary Policy Statement.
That means the RBNZ will likely give less away in terms of how it views the overall economic outlook.
“Global financial sector wobbles suggest a degree of caution is appropriate, which the RBNZ can now afford given they are fairly confident the OCR is now in contractionary territory,” said ANZ chief economist Sharon Zollner.
“We continue to forecast the OCR to peak at 5.25 per cent with one more hike to come in May.”
While Zollner sees 25 basis points as most likely and she argues that if the RBNZ was to take a different approach then a 50 basis point hike is still more likely than a pause.
She notes that GDP fell 0.6 per cent in the December quarter - a stark contrast to the RBNZ’s expectation of a 0.7 per cent lift.
“The data showed clear evidence of slowing economic momentum,” she says.
“However, our take is that post-Covid noise and labour shortages mean it would be too simplistic to ascribe all the weakness to the demand side of the equation. It overstates the underlying rate of cooling.”
BNZ head of research Stephen Toplis agrees that we have a 25 basis point hike coming.
“We believe that the RBNZ will give an explicit nod to the fact that the tightening cycle is probably not complete,” he says.
“Moreover, we think the bank will give some warning that the peak in the cash rate, whatever it may be, will not be short-lived.”
But he puts more weight on the lower starting point for GDP and believes the international banking issues will weigh less heavily.
The softness in the GDP data should have concerned [the RBNZ],” he says. “After all it cited the upward surprise in September quarter economic activity (released in December) when it delivered its 50 basis point hike in February.”
But based on last week’s speech by RBNZ chief economist Paul Conway, Toplis feels the RBNZ will push back against global market concerns.
“The RBNZ sees little threat to the stability of the New Zealand banking system. Accordingly, there is no need for the Reserve Bank to moderate its stance based on recent global financial market dislocation,” he says.
Where there will be more interest is in what the RBNZ signals about future moves, says Westpac’s new chief economist Kelly Eckhold.
“There’s a growing sense that we’re nearing the peak for this cycle if not all the way there yet,” he says.
“Given the lingering risks around high inflation, it would make sense for the RBNZ to retain the option of further rate hikes in the months ahead.”
After the December quarter GDP shock and “after accounting for downward revisions to growth in the previous quarters, the level of activity is a whopping 2 per cent below what the RBNZ had assumed”, he notes.
“On its own, the weak December quarter result seems to have been more of an air pocket than a crash landing – the higher-frequency data has actually been improving again in the first few months of this year.”
Nick Tuffley, ASB chief economist. Photo / supplied.
“Still, the starting point matters. If the economy is not running as hot as thought, that will affect any calculation about how far it needs to slow in order to bring inflation under control.”
ASB’s chief economist Nick Tuffley also expects the RBNZ’s statement next week will acknowledge slower than expected NZ growth and the wobbles in the US and European banking systems.
“Although the RBNZ will point out that the New Zealand Banking system remains strong, with our banks well capitalised and more resilient,” he says.
“The RBNZ will also reiterate that New Zealand inflation is much too high and that it needs to be brought down.”
The statement’s policy conclusions were likely to reiterate that “the OCR still needs to increase”; that “monetary conditions need to tighten further”, and that the Monetary Policy Committee “remains determined to achieve its Monetary Policy Remit”, he says.
“After April we expect one final 25bp increase in May. That is a touch lower than the RBNZ’s 5.5 per cent peak in its February forecasts. But either way, the end of the tightening cycle is creeping a little closer.”
