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RBNZ to hike OCR 150 bps in second half of 2010, JP Morgan says

RBNZ to hike OCR 150 bps in second half of 2010, JP Morgan says

JP Morgan economist Helen Kevans said they now expect the Reserve Bank of New Zealand to hike the Official Cash Rate (OCR) by 150 basis points (bps) over the second half of 2010, beginning with two 50 bps hikes in July and September. Kevans said they expect the Reserve Bank to be more aggressive in its stimulus withdrawal after JP Morgan revised up its GDP forecasts for the New Zealand economy for the second half of 2009 and 2010. A 75 bps or even 100 bps hike to kick off the tightening cycle may also be on the cards, although Kevans thought a 50 bps hike would suffice, given more borrowers have been shifting towards shorter mortgage terms in recent months. The Official Cash Rate has sat at a record low of 2.5% since the end of April 2009, with Reserve Bank Governor Alan Bollard saying he expected the rate to remain at or below its current level until the latter part of 2010. JP Morgan have the RBNZ's first rate hike penciled in for July, suggesting Bollard will stick close to the 'low till late 2010' pledge. Markets, however, are picking rate hikes from the RBNZ as early as January after the Reserve Bank of Australia put up its key rate by 25 bps earlier this month. "We acknowledge the risk of an earlier move, but believe it would take significant upside surprises in the economic data to prompt a rate hike in 1H10 (the first half of 2010)," Kevans said. "We forecast the RBNZ will shift to a neutral policy stance early in 2010, paving the way for the first hike to be delivered in July. That said, we now forecast a succession of larger rate moves, as delaying the first rate hike will mean the RBNZ will have to be more aggressive when the tightening cycle begins," she said. "The first OCR hike will be a 50bp move, followed by another 50bp hike in September, and 25bp hikes in October and December, respectively. These will take the OCR to 4% by end-2010. Previously, we had anticipated a steady stream of 25bp moves, but with the output gap closing more quickly, we believe policy will need to be normalized more swiftly than before." "Even larger rate hikes are a risk given the significant amount of policy stimulus to be withdrawn. Given the rapid rate at which the OCR was cut, the RBNZ could hike the cash rate 75bp, or even 100bp, to kick off the next tightening cycle." "We believe, though, that as long as the household sector continues to move toward shorter-term borrowing, the rate hikes delivered will get more bang for their buck, so 50bp hikes will suffice. The amount of fixed rate loans locked in for less than a year was 37% of all loans as of July, double the 19% at the start of 2008." "(W)e now anticipate GDP growth to average 0.5%q/q in 2H09 (the second half of 2009). A run of upbeat confidence surveys, combined with an upwardly revised forecast payout to dairy farmers, suggests the recovery will be sustained in 2010, for which we now forecast growth of 2.8% (up from 2.3% previously)." "The Westpac McDermott-Miller consumer confidence index jumped to a four-year high in 3Q, signalling stronger household consumption in coming quarters. Surprisingly, confidence in the outlook for the labor market improved, even though the unemployment rate should meander higher, approaching 8% in mid-2010. It will be at least another 12 months before employees will be in a position to demand higher wages. In the meantime, rising unemployment and high levels of underemployment will mitigate another housing-fueled consumer spending spree, easing the RBNZ's concerns that this would hamper the chances of a sustainable recovery." "The key risk to our consumption forecast is the prospect of a pullback in net immigration, which could come to fruition if economic conditions offshore continue improving at their current rate." "A turnaround in immigration would have significant negative consequences, particularly for the housing market. With the birth rate so low, the country relies heavily on immigration to boost population growth, and demand for housing." "Business confidence also has been ratcheting higher. The NBNZ business confidence survey showed an impressive 15-point spike in September, with a net 49% of respondents expecting better times ahead. The RBNZ should have found comfort in that inflation expectations remained contained, with stronger activity yet to translate into expectations of higher prices. Inflation expectations have eased sharply since 2H08 (second half of 2008)"”the RBNZ's own inflation measures, which at 1.8%oya one year out, are their lowest since 1999." Click here to return to the interest.co.nz homepage.

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