The Reserve Bank (RBNZ) is expected to hike the official cash rate again on Wednesday as it continues efforts to cool inflation despite signs the economy is already slowing.
Inflation is sitting at 7.2 percent, just below a three-decade high. In addition, the aftermath of Cyclone Gabrielle was expected to increase consumer prices and disrupt production in the near term, the RBNZ said after its last rate hike in February.
“Economic output fell by 0.6 percent in the December quarter. That was a sharper decline than we and other analysts expected. The result was also well below the RBNZ’s forecast for a 0.7 percent rise in activity over the quarter,” Westpac said in its weekly report.
“We estimate that the GDP surprise alone would knock about 50 basis points off the peak of the RBNZ’s rates profile. That would still make a 25bp hike at the April review a reasonable prospect but casts some doubt about the need for further moves.”
The RBNZ has recently solely focused on curbing inflation, lifting the official cash rate (OCR) by 450 basis points since October 2021. It hasn’t, however, delivered a hike as low as 25bp since February last year.
But with the global economic situation becoming bumpier since the RBNZ’s last rate hike (50bp) – including the collapse of multiple major banks – OCR expectations have eased significantly, Westpac said.
Other New Zealand-based economists agreed with Westpac’s expectations the RBNZ would hike the OCR by a smaller 25bp in its Wednesday monetary policy statement (MPS).
But BNZ said it believes the central bank still has more work to do.
“That said, we doubt the bank will want to say anything too specific on Wednesday, about the way forth… The markets are no longer convinced of the 5.5 percent peak the RBNZ forecast in its February MPS, however. Indeed, they are of the view the bank will start reducing its cash rate later this year, albeit glacially.”
The RBNZ’s Wednesday MPS will be “relatively straightforward” – but could potentially “pivot” and release a new updated OCR track at its next meeting in May, KiwiBank said.
“We expect the RBNZ to hike to 5.25 percent, not 5.5 percent. Although we think they ‘should’ stop this Wednesday at 5 percent,” it said in a note. “Inflation may be running hot, but many households and businesses are feeling the strain from the rapid rise in interest rates. We have seen some clear evidence that rate hikes are working.”