BNZ economists say it would have been better for the Reserve Bank (RBNZ) to just raise the Official Cash Rate by 25 basis points and caution that further rate increases would be likely if labour market conditions and inflation did not move in the desired manner.
On Wednesday the RBNZ blindsided financial markets by unexpectedly hiking the OCR by 50 basis points to 5.25% when market pricing had been factoring in a 25-point rise.
The move has prompted fairly widespread concern and criticism as being maybe too much.
BNZ's head of research Stephen Toplis wondered whether the decision by the RBNZ "had very little to do with economic conditions" and more to do with the fact that falling global interest rates had driven New Zealand wholesale rates lower.
"There was no need to go like a bull-at-a-gate at this juncture. This is not the start of the tightening cycle," he said.
The RBNZ has now driven up the OCR by some 500 basis points since beginning this tightening cycle in October 2021. It's an unprecedented rate of increase and has taken the OCR to heights not seen for 14 years (at which time the OCR was starting to rapidly descend after the Global Financial Crisis).
"One of the things the Reserve Bank is supposed to take into consideration is that its actions do not generate unnecessary volatility in financial markets and the real economy," Toplis said.
He believed the approach taken by the RBNZ "will most definitely generate heightened volatility in both".
Toplis said the BNZ economists were "bamboozled as to what to forecast for the next [OCR] meeting, in May".
"We think the RBNZ has done more than enough to impact the things that it can impact," he said, and had believed that before Wednesday’s "bombshell".
"On that basis, we are strongly tempted to stick with our view that the cash rate peaks at 5.25% and, hence, assume rates are unchanged at the May meeting.
"But will the RBNZ get the data it needs to be comfortable doing this? We think not."
Toplis said the BNZ economists are forecasting that in the Consumers Price Index (CPI) inflation release due out on April 20 the quarterly increase will be "at least as big" as the RBNZ’s 1.7% estimate.
"Moreover, with petrol prices now again in the ascendancy it looks like most folk, including the [RBNZ], will be revising upward their Q2 CPI expectations," Toplis said, although adding that higher inflation outcomes "may already be baked into" Wednesday’s decision,
Toplis said on Wednesday May 3 the latest labour market data are released and "there is a reasonable chance" the labour market remains tighter than the RBNZ has forecast albeit that wage growth might not be.
And then on May 18 the Government releases its Budget.
"Who thinks there will be no fiscal slippage in this? To start with, revenue is already slipping meaning that this (and next) years’ operating balances are likely to be 'worse' than currently built into the Reserve Bank’s forecasts. You can then add on some spending associated with the cyclone relief. Of course, there is also the widespread view that the Government will deliver a typical election year Budget. It might but we think that the Minister of Finance will contain this as much as is possible given that he fully understands how the Reserve Bank would respond to any further stimulus. Some slippage is still likely.
"Taking all things into account we thus, reluctantly, forecast that the RBNZ will raise the cash rate a further 25 basis points at its May 24 MPS [Monetary Policy Statement] taking the cash rate to its final resting place of 5.5%.
"We say reluctantly because we think the Bank has already done more than enough.
"Our fear is that if the RBNZ sticks dogmatically to focussing more on the actual data than the leading indicators that it might continue to surprise on the upside."
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