NZ wholesale interest rates shoot higher on hawkish statement from RBNZ

Wholesale interest rates have shot higher after the Reserve Bank's 75 basis point rate hike. Photo / NZ Herald

Wholesale interest rates shot sharply higher after a far more hawkish-than-expected monetary policy statement from the Reserve Bank.

The bank hiked the official cash rate by 75 basis points and forecast the official cash rate (OCR) to peak at 5.5 per cent mid-way through next year - far higher than most commercial banks’ expectations.

The Reserve Bank had previously forecast an OCR peak of just 4.1 per cent.

The two-year swap rate, which has a big influence over home mortgage rates, rose by 28 basis points to 5.30 per cent on the news, while the 10-year swap rate gained 20 basis points to 4.55 per cent.

The three-quarters-of-a-point hike had been about 70 per cent priced in by the financial markets.

The key message from the bank’s news release was: “The [monetary policy] committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term.

“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.”

The Reserve Bank’s aim is to try and cram annual inflation into a 1 to 3 per cent band.

In its most recent release, Stats NZ said inflation came to 7.2 per cent in the September year.

Imre Speizer, head of NZ markets strategy at Westpac, said part of the market reaction reflected the fact that a 75-basis-point hike had not been fully priced in.

“The big thing though was the elevation of the OCR track to show 5.5 per cent, which had leapfrogged pretty much all the economists’ forecasts - certainly ours,” Speizer said.

“We thought at a stretch they would go to 5.0 per cent, and they have gone well beyond that,” he said.

“Clearly, they have been shaken by the inflation and inflation expectations data, as well as the [strong] labour data.

“Things were too hot on those fronts - those were the key components which rattled them enough to move,” Speizer said.

Adding to the strongly hawkish tone was the monetary policy committee’s discussion that a 100 basis point move had been considered.

“On the balance of risks, the Committee agreed that a 75 basis point increase was appropriate at this meeting,” the committee’s minutes say.

“Members highlighted that the cumulative tightening of monetary conditions delivered to date continues to pass through to the economy via the lagged transmission to effective retail interest rates.”

Capital Economics, in a commentary, said it looked as if the central bank was willing to send the economy into recession.

“It now seems likely that the OCR will peak above our existing forecast of 5.0 per cent, but we still expect inflation to moderate faster than the Bank is anticipating, opening the door to rate cuts late next year,” Capital Economics said.