RBNZ will sit pat this week – BNZ

Stephen Toplis, Head of Research at BNZ, suggests that there is no excuse for the RBNZ cash rate to be just 1.75% in New Zealand, but odds are the Reserve Bank will find one when it delivers its May 11, Monetary Policy Statement.

Key Quotes

“As we see it: inflation expectations are elevated and rising; growth is at or above trend; capacity constraints are intensifying; headline and core inflation are around the mid-point of the Reserve Bank’s target band; the currency is proving to be weaker than anticipated; and commodity prices are pushing New Zealand’s Terms of Trade to near record levels. All of this argues for the cash rate to be a lot closer to neutral than where it currently is.”

“So why do we think the RBNZ will sit pat this week? Simply because it said it would. When it released its March OCR review, the Bank reaffirmed that not only did it expect interest rates to stay where they were for the foreseeable future but it went on to reiterate that it thought there was equal chance that the next move could be a cut as a hike. To hike this week would leave the Bank with egg splattered all over its face, a prospect it couldn’t abide.”

“Taking all this into consideration, we not only believe the RBNZ will have to formally move to a tightening bias but we also believe that it will, eventually, be forced into moving rates even earlier than we have previously hypothesized. Accordingly, we are taking this opportunity to move our own projected first tightening from May 2018 to February 2018 even though we doubt the RBNZ will say anything of the sort this time around.”