Reserve Bank Governor Adrian Orr during his press conference after announcing they have left the official cash rate unchanged at 0.25 per cent, in line with market expectations, Wellington. 11 Novembe
Reserve Bank Governor Adrian Orr during his press conference after announcing they have left the official cash rate unchanged at 0.25 per cent, in line with market expectations, Wellington. 11 Novembe
The Reserve Bank delivered a 25 basis-point rate hike as expected yesterday, but it came with a hawkish outlook and forecast for an OCR peak above 3.25 per cent by 2024.
At face value, the latest RBNZ was telling markets to expect at least 10 consecutive rate hikes of a quarter per cent, without any pause, said Fisher Funds head of fixed income David McLeish.
"That is unprecedented," he says.
It was important to remember that there was a lag between the actions taken this week and the effects being fully felt in the economy.
That could be anything from nine to 18 months based on the RBNZ's own expectations.
David McLeish, Head of Fixed Income at Fisher Funds Photo: Supplied.
"Normally the course of action for a Reserve Bank would be to hike a few times, pause, wait for those effects to be felt by the economy," he said.
McLeish said he found the aggressive rate track "curious" when looked at it in context of the RBNZ's big focus on the supply side causes of inflation.
"I heard a lot about the supply side issue, not only through reading the monetary policy statement but listening to the press conference afterwards," he said.
"There seems to be an assumption that interest rates can bring this sort of inflation down. And what's more, that it can bring it down without causing an economic downturn.
"Higher interest rates, in my opinion, have very little impact on this kind of inflation," he said.
"How are you going to fix supply bottle necks around the world by raising New Zealand interest rates? I'd actually go as far as to say that it will make things harder."
Higher interest rates could curb investment in production as the cost of capital rises.
"That actually flies in the face of what they're doing," he said. "So there are risks."
McLeish said investors would be naive to think this won't have any impact on local markets.
We had already seen the effect of the RBNZ being the first in the world to start hiking, with mediocre performance of the NZX50 across the past few months when compared to other markets around the world.
"There is a link between interest rates and risk appetite and therefore markets," he said.
As far as the wider economy was concerned there were signs of the recovery taking hold and that flowing through to some good company results.
"What could upset the apple cart is if our central bank goes too hard and too fast and doesn't allow this recovery to take hold."
a href='https://www.iheart.com/podcast/1049-continuous-disclosure-89308442/' target='_blank'>
Continuous Disclosure is available on IHeartRadio, Spotify, Apple Podcasts, or wherever you get your podcasts. New episodes come out every second Wednesday.
