NZ: Unlikely that RBNZ will hold off on hikes for long - Westpac

The analysis team at Westpac, points out that in February, the Reserve Bank’s of NZ projections assumed that the Official Cash Rate would remain on hold until 2019, but with inflation already at levels that the RBNZ wasn’t expecting to see for another three years, it now seems unlikely that they will hold off on hikes for that long.

Key Quotes

“We had previously pencilled in the first OCR hike for early 2019, which is on the later side of the range of market forecasts. But that timing will be under review in coming weeks, as part of a broader review of our forecasts.”

“However, even though rate hikes are likely to come a bit sooner than we had previously been factoring in, we still expect that the OCR will be adjusted at a fairly gradual pace. Much of the recent pickup in inflation has been due to temporary factors, with the impact of recent weather related food price increases and last year’s petrol price gains set to fade over time.”

“What matters for the RBNZ is whether there are signs of a sustained lift in medium term inflation pressures. And that will require an extended period of strong domestic activity. It’s true that we have seen some positive signs in terms of domestic activity. But there are a couple of important things to keep in mind. First, New Zealand’s population is currently growing at some of the fastest rates we’ve seen since the 1970s. That alone should mean that we see firmer growth. It also means that we have a greater capacity to grow without a significant increase in inflationary pressures.”

“Next, and importantly for the RBNZ’s policy stance, much of the strength that we’ve seen in both economic activity and inflation has been underpinned by earlier reductions in interest rates. But the argument runs in both directions: earlier interest rate hikes could see the momentum in activity and inflation fading quickly. In fact, we’ve already seen the housing market cooling in response to the lift in longer-term interest rates since late 2016.”

“This means that to ensure there is enough momentum in activity to generate the lift in inflation that they are looking for, the RBNZ will need to keep the OCR at low levels for some time yet. The RBNZ will also be wary of adding to the upside pressure on the NZ dollar.”