The Reserve Bank’s monetary policy committee will meet next week for its next Official Cash Rate (OCR) review, widely expected to be another 25 basis point increase.
Economists and bond traders are divided on what will happen next, although most agree that the end of the tightening cycle is approaching.
BNZ head of research Stephen Toplis said the RBNZ still thinks it has more work to do fighting inflation and recent “banking sector ructions” will not put it off more rate hikes.
At the time of the February monetary policy statement, the central bank signaled its cash rate would peak at 5.5%, implying three 25 point increases from its current 4.75%.
“And then the wheels fell off,” Toplis said in a note on Monday.
Fourth quarter gross domestic product data was much weaker than the RBNZ’s forecast, the impact of Cyclone Gabrielle had become more apparent, and banking troubles had emerged overseas.
“Markets responded with a sharp about face questioning whether the RBNZ would ever raise rates again and pushing the expected peak in the cash rate down towards 5%”.
Kiwibank chief economist Jarrod Kerr said the RBNZ’s original plan to hike all the way to 5.5% was becoming increasingly unlikely.
The two-year swap rate has fallen from 5.5% earlier in the month to roughly 4.85% and the implied terminal (peak) OCR had dropped to 5.15% - also from 5.5%.
“We have always said a move beyond 5% would be a step too far,” he wrote in a note.
The US Federal Reserve chose to go ahead with a rate hike last week, despite direct exposure to the banking crisis, but watered down its outlook.
Traders then watered it down further, and started pricing in US rate cuts from June onwards.
“Historically the Fed has tightened monetary policy until something ‘breaks’. Well here we are, something broke,” Kerr said.
Fight inflation on the beaches
Westpac NZ’s economics team recently revised its OCR forecast to peak at 5% after a 25bps lift next week.
However, the economists said RBNZ chief economist Paul Conway's speech last week was tough on inflation and the risks are skewed towards further OCR increases beyond next Wednesday.
ABS economist Nick Tuffley said the speech was “Churchillian”, referencing the British Prime Minister famous for his war-time speeches, and reinforced the idea of more rate hikes.
“All that was missing from the speech notes was a bulldog themed coat of arms,” he said.
BNZ’s Toplis said since the central bank does not produce a rate track when it releases a monetary policy review, there may not be any signal as to what will happen next.
“There is a good chance that complete obfuscation leaves us none the wiser as to whether the bank has changed its view on the OCR peak or not”.
This gives the monetary policy committee more time to make a decision and wait for global banking conditions to settle. BNZ still expects a cash rate peak of 5.25%, but warned it would be “premature” for the RBNZ to send that signal.
Conway’s speech emphasized the importance of inflation expectations in setting policy. This means the ANZ business confidence survey, released Thursday, will be closely watched.
Both economists and the RBNZ will be interested to see the employment and inflation indicators and whether tighter monetary policy is having the necessary effect.
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