RBNZ Preview: When Will the RBNZ Stop Delivering 50bp Hikes?

Summary

• The last meeting saw the Reserve Bank of New Zealand (RBNZ) hike the Official Cash Rate (OCR) to 3% (+50bps) and forecast a ~4.1% terminal rate.
• In the interval, official data has been sparse. You could make a case, domestically, that a significantly higher forecasted terminal rate is little needed.
• Survey data backs a strong labour market while the NZD TWI is far weaker than expected. It provides partial support to the additional 80bps markets that have priced into the implied RBNZ terminal rate, though global factors likely play a large role.
• We continue to expect the RBNZ to hike the OCR to 3.5% (+50bp) on 5 October and then to 4% (+50bp) on 23 November. We think the RBNZ is unlikely to stop there and will hike again in 2023.

Introduction

At the last meeting, the RBNZ hiked the OCR by 50bp (to 3%) for the fourth time in this cycle, taking their tally of work to 275bps. They also signaled their intention to deliver at least another 100bp of hikes (strictly, they forecasted a ~4.1% terminal rate), in the likely form of another two 50bp hikes, on the back of a more resilient forecast of inflation (Charts 1 and 2). At the time, markets agreed; OIS implied a 4% terminal rate. Now, there is considerable distance; OIS are implying a 4.8% terminal rate! So, what has changed?

You Could Argue a 4% Terminal Rate Could Be Right

One could argue that not a lot has happened. To start, second-quarter GDP (1.7% QoQ) registered a smidgen below forecast (1.8% QoQ), there had been no update to official inflation numbers, while inflation expectations were (and still are) falling (Charts 3 and 4). Moreover, retail sales fell 2.3% QoQ over the second quarter.

But You Can Easily Argue the Market is Right, Too

But two worries continued to mount during the interval. First, the labour market has remained tight (Charts 5, 6, and 7). Second, NZD TWI fell sharply below forecast. On average, it now sits 4.6% below where the RBNZ envisioned it (Chart 8). It likely adds to inflationary pressures with New Zealand in a record trade balance deficit and imports (Charts 9 and 10).

Bottom Line

The RBNZ will likely reiterate a similar message to what they gave in August – the labour market is tight, inflationary pressures remain, but the economy is beginning to feel the effects and downside growth risks exist.

We continue to expect the RBNZ hike to 3.5% (+50bp) next week (5 October) and to 4% (+50bp) in November. We think the RBNZ is unlikely to stop there and will hike again in 2023.

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.)