New Zealand Set to Lift Rates, Signal More Aggressive Tightening
New Zealand’s central bank is expected to raise interest rates for a second straight month and signal a more aggressive tightening cycle to contain inflation amid a labor shortage.
The Reserve Bank will lift the official cash rate by 25 basis points to 0.75% on Wednesday in Wellington, according to 21 of 23 surveyed economists. Two predict a hike to 1% and investors see a risk the RBNZ will opt for a 50 basis-point increase, but the bank could instead signal faster tightening ahead.
“It’s entirely reasonable that the market is asking whether the RBNZ might not want to get a move on and and deliver a 50-point hike,” said Sharon Zollner, chief New Zealand economist at ANZ Bank. However, it could achieve a similar impact by significantly raising its cash-rate forecasts, she said.
Central banks around the world are retreating from the view that faster inflation is transitory. The RBNZ may be followed by a Bank of Korea hike on Thursday, while the U.K.’s December meeting is finely balanced and surging U.S. prices are pressuring the Federal Reserve to pivot more quickly to tightening.
New Zealand’s job market is as tight as it’s ever been, while inflation at 4.9% is well above the RBNZ’s 1-3% target and forecast to accelerate further. At the same time, there’s uncertainty around the outlook. Kiwis are bracing for Covid-19 to spread across the country when Auckland comes out of lockdown and a border around the city lifts on Dec. 15.
Tomorrow’s decision is due at 2 p.m. local time and Governor Adrian Orr will hold a virtual press conference one hour after the announcement.
Investors are pricing a 40% chance that the RBNZ will raise rates by 50 basis points, swaps data show. They boosted bets last week after a survey of two-year inflation expectations jumped to the highest level in a decade.
House prices have been rising at an annual pace of over 30%, and there’s a long gap between Wednesday’s decision and the next one on Feb. 23. That may encourage policy makers to consider a bigger hike now.
Still, mortgage rates have surged since the RBNZ’s first increase last month. That will have a powerful slowing effect on both the housing market and retail spending next year, said Mike Jones, senior economist at ASB Bank in Auckland.
“The RBNZ will be wary of heaping more pressure on given the explosion in household debt over the past 18 months,” Jones said. The bank is also “acutely aware of the struggle in some parts of the economy thanks to Covid restrictions.”
When it published its last set of projections in August, the RBNZ saw the cash rate rising to a neutral level of 2% in late 2023. Economists now expect it to lift that track substantially to show the rate reaching 2% by mid-to-late next year and continuing to climb thereafter.
“We expect the endpoint for the RBNZ’s OCR forecast to be revised up substantially, perhaps as high as 3%,” Zollner said.
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