New Zealand Raises Rate by Half-Point, Still Sees 5.5% Peak

New Zealand’s central bank raised interest rates by half a percentage point, slowing its pace of tightening, but signaled further hikes will be needed to tame inflation.

(Bloomberg) — New Zealand’s central bank raised interest rates by half a percentage point, slowing its pace of tightening, but signaled further hikes will be needed to tame inflation.

The Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 4.75% from 4.25% Wednesday in Wellington, as expected by 20 of 23 economists surveyed by Bloomberg. The bank’s forecasts show the OCR peaking at 5.5% this year, unchanged from its previous projections though taking slightly longer to get there.

“While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation,” the RBNZ said in a statement. “The Committee agreed that monetary conditions need to tighten further.” 

Slower-than-expected inflation and a softening labor market had fueled bets the RBNZ would step back from a repeat of the jumbo 75 basis-point hike it delivered in November. Indications that economic growth will take a near-term hit from the impacts of Cyclone Gabrielle also warranted a less aggressive approach, although the potential inflationary impacts from the disaster still need to be assessed.

The currency rose after the decision and was trading at 62.26 US cents at 4:35 p.m. in Wellington. 

New Zealand is still responding to the shock of Cyclone Gabrielle, which destroyed infrastructure, flooded homes and displaced thousands as it cut across the upper North Island last week. Orchards and food producing regions were devastated, suggesting near-term shortages and price spikes.

“The overall tone of the policy assessment remained hawkish, while empathetic to those affected by recent weather events,” ANZ Bank New Zealand said in a research note after the decision. “Inflation risks remain front and center, as they must.”

Storm’s Impact

New Zealand’s Treasury Department yesterday said the rebuild of homes and infrastructure will add demand to an already capacity constrained construction industry and lead to general, nationwide inflation pressure. That could result in the RBNZ keeping interest rates higher for longer, it said.

The RBNZ said it’s too early to accurately assess the monetary policy implications of the storm. The timing, size, and the nature of the government’s fiscal response are also yet to be determined, it said.

The Committee’s current assessment is that over coming weeks, prices for some goods are likely to spike, activity will be weaker than previously expected and export revenues will be negatively impacted. 

“Monetary policy is set with a medium-term focus, and the Committee will look through these short-term output variations and direct price effects,” the central bank said. “In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.” 

New Forecasts

The RBNZ’s updated forecasts are little changed from those it presented in November. They show the OCR rising to 5.5% in the fourth quarter of 2023 — previously it was in the third — then gradually declining from the third quarter of 2024.

While some economists expect the RBNZ will follow with a half-point hike at its next review on April 5, others argue that the RBNZ has scope for a series of smaller moves because it has longer to get to its projected peak. All options will be on the table when policy makers next meet, Governor Adrian Orr said.

“We have come a long way and fast with our Official Cash Rate,” he told reporters. “Now that we are confident we are in a restrictive position, we are afforded more time to reflect on whether we’re seeing the outcomes we are hoping to see by now. So we’re in a much more flexible position.”

There is a 40% chance of a half-point hike in April, according to swaps prices.

What Bloomberg Economics Says…

“Deterioration in the global and domestic economies, together with easing global inflation, are likely to prompt the RBNZ to soften its hawkish stance and reverse course, potentially as soon as late 2023”

—James McIntyre, economist.

To read the full note, click here 

The central bank reiterated it expects a recession starting in the second quarter of this year, but the economy is seen bouncing back a little sooner next year.  

Inflation will accelerate to 7.3% in the current quarter from 7.2% in the fourth quarter of 2022, the new projections show. Inflation will be slightly firmer than previously expected through the second half of 2023 but return to the top of the central bank’s 1-3% target range by the third quarter of 2024, unchanged from the previous forecast.

The RBNZ’s switch to a more moderate OCR increase brings it closer to global peers that have slowed the pace of tightening as rate-sensitive sectors of their economies start to weaken. Still, the half-point move puts New Zealand at the upper end of recent increases.

The Federal Reserve earlier this month raised by a quarter-point, slowing from a 50 basis-point hike in December and four consecutive 75 basis-point increases before that. Australia’s central bank down-shifted to quarter-point moves in October, although it turned hawkish in February after having considered a pause in December.

(Updates with Orr comment in 14th paragraph.)

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