RBNZ Review: RBNZ Hike 50bp, but 75bp Entered the Discussion

Summary

• The Reserve Bank of New Zealand (RBNZ) hiked the Overnight Cash Rate (OCR) by 50bp (to 3.5%) for the fifth time in this cycle. 75bps was also up for discussion.
• Some members were concerned about persistent inflation, which could be pushed higher by a potential wage-price spiral and NZD weakness. Others wanted to wait to see the effects of their 325bps of hikes.
• We continue to expect another 50bp in November, taking the OCR to 4.0%, and for work to continue in 2023.  

Some Board Members Unnerved at Thought of Higher and More Persistent Inflationary Pressures

The RBNZ hiked the OCR by 50bp (to 3.5%) for the fifth time in this cycle taking their tally of work to 325bps, in line with our expectations. NZD fared well from the announcement, strengthening across the board, with strength later pared only against USD.

This meeting was not adjoined by new forecasts. Consequently, the statement was even more important. Here are the interesting bits:

• Core inflation worries: The Board highlighted that while headline inflation is falling (globally), ‘core measures of inflation have risen and persist’.
• FX adding to inflation: NZD is weak, and if sustained, it ‘poses further upside risk to inflation over the forecast horizon’. This concern was far more explicit than in August.
• Households adding to pressures: Household balance sheets are resilient. This is, in part, because retail interest rates have yet to fully reflect wholesale interest rates (institutional borrowing rates). The board is looking for the resetting of fixed-rate mortgages to negatively impact household consumption – survey data for September shows consumption is remaining resilient overall.
• Wage-price spiral worries: ‘Wage pressures are heightened’. And, with the labour market yet to ease, members discussed the likelihood of further upside. Some noted this may lead to a wage-price spiral.
• 50bp hike was not unanimous: A 75bp hike was proposed by some board members. They argued it would reduce the likelihood of a higher peak in the OCR being required. The others argued that significant work has been done and that they should wait for transmission.

In summary, the statement was relatively balanced. Some members want to wait for their significant work to be reflected in economic data. Others are worried that heightened core inflation could persist longer than expected. The additional 25bp they tried to argue for here, is likely to be added in 2023. As a result, we continue to expect another 50bp will follow in November, taking the OCR to 4.0%, and for hikes to continue in 2023, likely in smaller (25bp) increments. At this juncture, we do not see value in fading hawkish market pricing.

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.

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