RBNZ Preview: RBNZ to Accelerate in the Face of Strong Data

Summary

• Inflation and the labour force proved stronger than the Reserve Bank of New Zealand (RBNZ) expected in their August Monetary Policy Statement. Inflation expectations have also continued to rise.
• Consumer spending has yet to ease, and economic data continues to surprise to the upside.
• We expect it will force the RBNZ to pick up the pace and to hike to 4.25% (+75bp) on Wednesday (23 November).

Market Implications

• Fed cuts are mispriced vs the RBNZ (and BoC).

Introduction

At the last meeting, the RBNZ hiked the OCR by 50bp (to 3.5%) for the fifth time in this cycle, taking their tally of work to 325bps – read our October RBNZ review. However, the decision was far from unanimous. Some members of the board pushed for a 75bp move – they were concerned about the risk of persistent inflation, which could be pushed higher by a wage-price spiral and NZD weakness – while others wanted to continue in 50bp increments, hoping to see the effects of their 325bp of hikes. Evidently, the comparatively less hawkish board members won the battle in October, but will they win in November? We think not.

Inflation

NZ Inflation Thundered Higher

New Zealand inflation jumped 2.2% higher through the third quarter, 0.8pp higher than what the RBNZ had expected (Chart 1). It also shocked the market. The thundering print came amid an acceleration in services inflation (5.1% YoY, 2.7% QoQ). Even core CPI saw no respite (6.3% YoY; 2.2% QoQ) which the Bank had expressed worry about at the October meeting (Chart 2).

Labour Force Stronger-Than-Expected

On the face of it, a forecasted unemployment rate (3.3%) has helped return the debate back in favour of a 50bp hike. However, the details are worrisome. Both employment and participation grew faster than the Bank had forecasted while hourly earnings also outstripped RBNZ expectations (Charts 3 and 4).

Inflation Expectations Pushing Higher

Stronger-than-expected inflation and labour force updates have fed into future expectations. Notably, business and consumer inflation expectations have risen again across all horizons (Charts 5 and 6). It is little helped by a weaker-than-expected NZD, though progress has been made as of late (Chart 7).

Consumer Spending Remains Unrelenting

For the doves on the board, they wanted to see a sign that interest rates have begun to affect consumption. Things are yet to meaningfully turn in their favour with sales driving higher and economic data proving positively surprising (Charts 8 and 9).

Bottom line

The RBNZ were prepared to see out their hiking cycle, sticking to 50bp hikes and a ~4% terminal rate, but now the data will likely force them into a larger-than-usual hike thanks to unrelenting inflationary pressures which are feeding into future expectations.

We continue to expect the RBNZ to hike to 4.25% (+75bp) on Wednesday (23 November).  

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)