The Reserve Bank may have "already done enough" with its increases in interest rates, BNZ's head of research Stephen Toplis says.
In a preview of the next Official Cash Rate review on February 22 Toplis says the BNZ's economics team "remain in the camp that says the Reserve Bank should now be moderating the pace of increase".
"Indeed, with the long lags between monetary policy setting and the economic reaction function, it is conceivable the Bank has already done enough. In particular, it is worth noting that a significant proportion of past tightening is still to hit mortgage holders’ cash flows. It will, in due course."
The OCR currently stands at 4.25% having been hiked at speed from just 0.25% at the start of October 2021. In an extremely 'hawkish' Monetary Policy Statement that came out in November with the last OCR review, the RBNZ hiked the OCR 75 basis points and indicated likelihood of a follow-up 75-pointer in February 2023. It forecast the OCR to peak at 5.5% in the middle of this year.
More recently, wholesale interest rate pricing has suggested the RBNZ may 'only' raise the OCR by 50 points to 4.75% and that's what Toplis is suggesting, though concedes it's a "line call".
He says monetary policy settings are extremely tight.
"The Reserve Bank has its foot firmly planted on the brake. There comes a time when such restraint is no longer necessary. We are definitely approaching that time."
He says however he recognises that financial markets are "very keen" to price in a near-term reduction in rates.
"The RBNZ will not want to encourage that sentiment so will be 'forced' to keep tightening," he says.
"Given this, we think the best approach for the Bank would be to raise the cash rate 50 basis points to 4.75%, signal 25 to 50 basis points further thereafter and then move to a data watching framework accompanied by a strong warning that it expects interest rates to stay elevated for an extended period of time."
Toplis says while he thinks a 50 basis point hike would be the “best” approach, it is easy to see how the RBNZ could justify maintaining the 75 point hike that was intimated at its meeting back in November.
In addition to moderating the pace of the tightening cycle, Toplis thinks the RBNZ may well lower its expected 'terminal' OCR rate by 25 basis points to around 5.25%.
"We doubt it would feel comfortable reducing it by any more than that, at this juncture. However, we remain of the view that the ultimate peak may be as low as 5.0% rather than the 5.5% the Reserve Bank currently forecasts and the market currently is giving a nod to. Whatever the case, we think that the peak will come relatively early in 2023, rates will stay there for around 12 months before trending lower starting in calendar 2024."
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