Summary
We expect the RBNZ will raise the Official Cash Rate (OCR) 25bp to 0.50% at the 6 October Monetary Policy Review.
This is a relatively high conviction view – we view both a 50bp hike or an on-hold decision as unlikely, barring unexpected dramatic developments.
Risks around our overall rate track are skewed in the direction of the RBNZ not delivering a full suite of hikes before trouble strikes. However, with global inflation pressures intense, risks are certainly not one-sided.
It’s a weird old time for the New Zealand economy. Momentum and confidence is strong, but about 40% of the economy is caught in a straitjacket. However, the RBNZ has made it clear that they do not view lockdowns as a reason not to hike the OCR, and stressed in the days following the August Monetary Policy Statement that it considered the on-hold decision to be a short delay, not a cancellation of hikes. The RBNZ set the bar high for the COVID outbreak to derail hikes, saying it would need to be clear it was a net demand shock, which in turn required a sustained drop in business sentiment. So what’s happened? Business sentiment has not only not stayed down – it barely fell at all! The preliminary ANZ Business Outlook for September showed very little difference between pre- and post-lockdown, or Auckland versus the rest of the country, for the forward-looking indicators. It’s a picture of remarkable resilience and confidence that normal service will shortly resume. We expect the QSBO survey, out the day before the MPR, will show consistent themes.
Meanwhile, inflation pressures remain intense. Headline inflation, core inflation, inflation expectations, pricing intentions, wage growth, indicators of capacity constraints, anecdotes of supply bottlenecks both in New Zealand and overseas, strong consumer willingness to spend, and not least the stonking Q2 GDP outturn all point to an economy that is experiencing sustained inflation pressures that could become embedded unless the RBNZ acts to head them off.
And act they will. We continue to expect follow-up 25bp hikes in November, February, May and August next year, taking the OCR to 1.5%. The RBNZ’s expectation is that they’ll keep right on going beyond that, given their view that an OCR under 2% is still adding fuel to the economic engine.
A 25bp hike is universally expected by economists and markets are currently pricing in around 90% odds of that too. As such, the decision to hike won’t in itself particularly perturb the market. But the tone of the press release and summary record of meeting could, especially with markets still clinging to the idea that a 50bp hike might be possible (there are 27bps of hikes priced in for the November meeting). While we expect hikes in October and November, any reiteration of the global tendency for central banks to move in 25bp increments (which we thought was crystal clear after the Hawkesby speech, but evidently not) has the potential to see expectations for November pared back a touch, especially if lockdowns need to be extended beyond next Wednesday, which we will know about by the MPR. Looking beyond the next two meetings, the bigger picture here is one of a market that is more or less fully priced for the next three meetings, and pricing in more hikes than we expect by May (we expect +100bps by May, the market is at +104bps). Given global fragilities and the risks around Delta, the hikes we have in our forecasts for 2022 are less assured, and any caution on the part of the RBNZ could see expectations for 2022 wound back too. If that were to happen, short end rates could drift lower.
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