RBNZ preview: 50 bps seems appropriate

The Reserve Bank of New Zealand (RBNZ) will announce its monetary policy decision on Wednesday, February 22 at 01:00 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of six major banks.

According to a Reuters survey of analysts, New Zealand’s central bank will only marginally reduce its tightening campaign on Wednesday with a half-point increase in interest rates to 4.75%. This is because inflation is still running at a level that is over three decades high.

This aligns the Reserve Bank of New Zealand (RBNZ), one of the first major central banks to begin removing stimulus from the epidemic era, approximately with its competitors, who are switching to modest rate hikes following a historically rapid-fire series of movements.

Since October 2021, the RBNZ has already increased interest rates by a total of 400 basis points. It will probably reach at least 500, with just over half of respondents anticipating a peak of 5.25% or higher by mid-year, which is marginally below the RBNZ’s own anticipated terminal rate of 5.50%.

At last count, inflation was 7.2%, and it won’t likely drop to the RBNZ’s target range of 1%-3% until next year.

Yet, one of the most expensive property markets in the world is currently seeing a dramatic decline in home prices. Along with lingering worries about a global slowdown, that will pressure the central bank to be judicious about further rate rises.

“In November, the Reserve Bank forecast they would raise rates by another 75 but they had a couple of things go their way. The details of the inflation report and the labour market report suggested a little bit less inflation pressure than otherwise,” said Sharon Zollner, chief economist at ANZ.

“Clearly, inflation in New Zealand is still far too high. So we think a reasonable compromise would be a 50-basis point hike rather than 75 but a very firm, hawkish tone – a very clear signal that more rate hikes are coming.”

The biggest financial institutions in the nation, including ANZ, ASB, Kiwibank, Bank of New Zealand, and Westpac, anticipated a 50-basis point increase on Wednesday. An estimated 98% likelihood of that occurring is what interest rate futures are pricing.

About half, or 12 of the 22 economists with a longer-term outlook in a Reuters poll, predicted that rates would reach 5.25% or higher by the end of June. The policy tightening cycle since the official cash rate was implemented in 1999 would then be at its most aggressive point.

Nevertheless, a comparison of the most recent survey with the poll from the previous month revealed that more than half of those respondents had decreased their peak rate projection for the second quarter of 2023 by 25 basis points, from 5.50% to 5.25%.

“The data over the last few months, while strong, hasn’t quite lived up to what the RBNZ was expecting. And when the facts change a little, you should change your mind a little,” noted Michael Gordon, acting chief economist at Westpac, one among the respondents who downgraded the peak rate forecast.