There was a time when the run-up to a Reserve Bank (RBNZ) Official Cash Rate review prompted debate about whether the rate would be increased, stay the same, or indeed be reduced. Well, we don't have such debates anymore.
Now it's all about whether we are going to get large - or extra large - rises.
Economists at the country's five biggest banks have all pretty much settled (with definitely some doubts expressed) on the RBNZ raising the Official Cash Rate by 75 basis points in what will be the last rate review of the year on Wednesday, November 23. Any rise bigger than 50 points will be a record although there have been much bigger drops.
Here's the background. The OCR is currently on 3.5%. It's been hiked some 325 basis points since the beginning of this 'cycle' in October 2021.
This year alone the OCR has been increased 275 basis points, which is already easily a record amount in one calendar year - with more to come.
The last five OCR reviews have each seen 50 basis-point hikes. So, if that cycle is to be broken this time then the most likely reason will be because the RBNZ has decided to go even BIGGER.
In a previous OCR preview article in October I actually suggested - more fool me - that the very long gap between the final OCR review of this year on November 23 and the first of next year on February 22 might (on this occasion) actually work to the RBNZ's advantage. Time to sit on the beach and contemplate and all that.
However, and this is how quickly these things have been changing, my comments were made at a time when the RBNZ's collective body language suggested some comfort on the part of the central bank that it had the inflation situation in hand in terms of an easing of pressures ahead.
The shock 7.2% CPI inflation figure as of the end of the September quarter obliterated any sense of comfort. Then there were the September quarter labour market figures. White hot. Job market tighter than tight and wage rises heading towards double digit percentages.
The results of the RBNZ's own latest Survey of Expectations were therefore suitably distressing reading too. Any sense of confidence out there that the RBNZ has this inflation thing under control has been severely knocked.
So, for the RBNZ that three month gap between OCR reviews is suddenly looking very long and uncomfortable. There will be no quietly contemplating an apparently under control anti-inflation drive now. In the RBNZ's own manner of speaking, it will be 'watch, worry and wait'. It will be about setting the OCR at the 'right' level for the summer months and then crossing fingers that things move in the right direction between the end of November and late February. Get the setting 'wrong' for the next three months and things could get difficult.
In terms of getting the 'right' OCR setting for the summer there's actually two components the RBNZ needs to juggle - there's the physical level the OCR will be set at and there's the level of the 'future OCR' as decided by the RBNZ's forecast of where the peak will be for the OCR.
This review on Wednesday 23rd is the full bells and whistles one that comes with a Monetary Policy Statement MPS (the last one of these was issued in August). So we will have all manner of projections and explanations available. In the August MPS the RBNZ forecast the OCR peaking at 4.1% in the middle of next year.
Now that's already completely out of date. At time of writing the wholesale interest rate markets are 'pricing in' a peak OCR of around 5.1%
So important has the RBNZ's future guidance on the level of the OCR become that arguably whatever the central bank puts as the expected peak for the OCR in this latest MPS (and when that's expected to be) might carry MORE weight than whatever the actual increase to the 'real' OCR is. Really.
The RBNZ therefore has to set a future OCR 'track' that will keep the right sort of tension in the interest rate markets. This has to be balanced with whatever the RBNZ decides to physically do to the OCR in the coming week.
If for example the RBNZ were to raise the OCR by 75 points to 4.25% on the 23rd, but only raise its OCR forward 'track' to a peak of 4.5%, you could expect to see wholesale interest rate markets quickly slackening.
But logically, if the OCR does hit 4.25% in the coming week it's difficult to imagine the RBNZ producing anything less than a new 'peak' forecast of 5%. Such a level would probably see pricing levels continue in the markets much as they are at the moment.
What, however, if the central bank bites the bullet and suggests a new peak of 5.5% or higher? That would be interesting. The much talked about market expectations of a 'pivot' from sharply tightening of monetary policy to more relaxed settings would be pushed into the future and reasonably meaningful retail interest rate moves - both for mortgages and term deposits - could be expected. Any suggestion the OCR could get as high as 5.5% will definitely fuel fears of the dreaded 'hard landing' for the economy.
This really is a pretty crucial time. OCR reviews haven't got much bigger than this one in terms of importance and impact. And somehow, I have a feeling it won't disappoint as an event.
So far through this hiking cycle the RBNZ has kept pretty much in line with market expectations in the size of its OCR moves - albeit that it has often set those expectations itself. The markets understood early on (last year and early this year) that the RBNZ would be moving the OCR up in 25 basis-point increments. Then it was understood that bigger moves - 50-pointers - would be on the agenda.
And then in its last OCR review on October 5, the RBNZ explicitly stated that it had seriously considered raising the rate by 75 points. Now that's the most common expectation for the size of the rise on Wednesday 23rd.
Consider this though: Since the October 5 review we've seen both inflation and labour market figures that were way hotter than expected.
My question then is, will it be enough for the RBNZ to hike the OCR on Wednesday by the 'expected' amount?
Look, I can tell you what would happen - there would be minimal market reaction, banks will move up their floating mortgage rates by the amount of the OCR hike and will take a careful look at how much they might raise fixed rates. They are definitely getting more cautious on this as fixed rates start climbing above 6%. Likewise banks will be cautious about raising term deposit rates.
There will then be much talk about the RBNZ beginning to 'pivot' early in 2023 to a more relaxed monetary policy position.
Is this the market reaction the RBNZ wants and would be happy with right now? Or does it feel still too far behind the inflation eight ball at this stage?
I still think this inflation battle is going to be much more drawn out than anybody wants to believe.
As I have noted before, the RBNZ under Governor Adrian 'shock and' Orr has shown a penchant for wanting to catch the markets 'off balance' sometimes, in order to cause an outsized reaction. Perhaps the most classic example of that was the shock 50-point cut to the OCR made in August 2019, which caught the wholesale interest rate markets and the Kiwi dollar on the hop.
Up to this stage of the current hiking cycle there's been no point and no value in catching the markets off-guard. It has in fact been to the RBNZ's advantage to have the markets singing along to the same tune as the central bank. This would all therefore suggest a 75-point move on Wednesday.
But we are at a crucial point - particularly with some of the 'pivot' talk around. Maybe the central bank doesn't want an 'as you were' market reaction this time. If the RBNZ's really worried about not having the inflation situation under control, and with a whole three months to the next OCR decision, well, it just might see value in creating an over-sized market reaction this time with some 'shock and Orr' tactics - in order to force market interest rates higher, at least in the short term.
That's why I'm still not ruling out the possibility of a super-jumbo 100-point hike. That would certainly send everybody off to the beach reeling...
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.