Waiting it out

With the economy continuing to grow at a solid pace, the RBNZ will still be thinking about the need to eventually hike rates. However, any increases could be a way off and are likely to occur gradually. This is because low inflation is giving the RBNZ ample time to continue mulling things over.

After hiking the OCR four times earlier in the year, the RBNZ paused in September and noted that a period of assessment and monitoring was now appropriate. But the RBNZ is still thinking about future hikes, with its November Financial Stability Report noting that “further increases in short-term interest rates may be required in the coming years.” This certainly doesn’t signal that rate hikes are imminent. But it does give us a clear idea of where the RBNZ’s concerns lie. So what is it that the RBNZ wants to see before hikes are back on the table?

First of all, the RBNZ will want to be certain that the economy is continuing to grow at a healthy pace as the boost from last year’s strong commodity prices continues to fade (on this front, prices were down another 3.1% in the latest Global Dairy Trade auction).

Recent developments do indicate that, although export earnings are softening, the domestic economy has remained firm. Our recent talks with businesses have had an upbeat tone to them. This has been reflected in surveys including the PMI and PSI which signal that output is continuing to expand at a robust pace.