Monetary conditions have been tightening in New Zealand for around a year now. While the market was briefly pricing a matching 75bp hike here, both economist expectations and market pricing are now firmly in favour of a 50bp move, making it the path of least resistance. And a 75bp could damage the “we got this” narrative.
But the RBNZ can’t slow down yet either. Cost and inflation indicators out of both our ANZ Business Outlook survey and the NZIER’s Quarterly Survey of Business Opinion continue to show no let-up.
The Monthly Employment Indicator rose in both April and May as Omicron disruption waned. Business owners may be downbeat about profitability, but they’re still looking to hire, and expected wages are high as firms fight for insufficient workers.
If there is a silver lining to a 50bp rate hike, it is that if the RBNZ chooses its language carefully, it could allay fears of even larger hikes going forward. We don’t necessarily expect the RBNZ to explicitly rule out a 75bp hike, but if it highlights that it is satisfied with the pace (and overall magnitude) of hikes to date (remembering that the RBNZ was an early starter this cycle), that ought to help contain future blow-outs in short-end rates. But it’s too soon for the RBNZ to “blink” just because asset prices are wobbling. That means it’s also a bit too soon to declare that we’ve seen the highs in term interest rates. -ANZ Market Research
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