New Zealand central bank signals rates may rise next year

Bloomberg

New Zealand’s central bank projected that its official cash rate may start to rise in the second half of next year, joining Canada in flagging a potential withdrawal of stimulus as economies recover from the pandemic. The kiwi dollar and bond yields surged.
The Reserve Bank on Wednesday published OCR forecasts for the first time in more than a year that show the rate beginning to rise in mid-2022. Any increase would be conditional on the economy evolving as expected, RBNZ’s monetary policy committee said. It held the benchmark rate at 0.25% and kept the bond-purchase program at NZ$100 billion ($73 billion).
“These are highly conditional projections,” Governor Adrian Orr told a news conference in Wellington. “You’re talking about the second half of next year, who knows where we’ll be by then.”
The New Zealand dollar nevertheless surged as investors ramped up bets on higher rates, with two quarter-point hikes now priced in next year. The kiwi bought 73.08 US cents at 4:35 pm in Wellington, up from 72.31 cents beforehand. Swap rates and bond yields also jumped, with the 10-year yield gaining more than 10 basis points.
Central banks have been pushing back against concerns about rising inflation pressures, signaling they want the economic recovery from the pandemic firmly bedded in before they contemplate policy tightening. But New Zealand’s success in containing Covid-19 allowed its economy to rebound more quickly than most, and the strength of its labour market had already prompted some economists to pencil in rate hikes for 2022.
“With the RBNZ set to become one of the first central banks in advanced economies to hike rates, we think that the New Zealand dollar will continue to strengthen against the US dollar,” said Marcel Thieliant, senior Australia and New Zealand economist at Capital Economics in Singapore.
The RBNZ’s forward track for the OCR, which had been suspended since last year, shows the average rate rising to 0.31% in second quarter of 2022 and to 0.67% by the end of the year. That implies at least one quarter-point rise in second half. The track shows the rate climbing to 1.78% by June 2024, the end of the forecast period.
The RBNZ said its quantitative easing program may not reach the NZ$100 billion limit by the time it is due to end in June 2022, reflecting latest projections for government bond issuance.
That reduced issuance was placing less upward pressure on bond yields, it noted.

The RBNZ “has unequivocally moved to a tightening bias,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington.
. “By reintroducing its OCR projection track, and including several rate hikes in that track, there can be no doubt as to where it sees the risks to the current 0.25% cash rate lying.”
The projections put New Zealand in the vanguard of stimulus removal in the wake of the pandemic. Canada is also a potential early mover, with its central bank last month announcing a reduction in debt purchases and projecting a faster economic recovery that may pave the way for rate increases next year.
In the US, Federal Reserve officials say they could begin discussing the appropriate timing of scaling back quantitative easing at upcoming meetings, while Australian policy makers are due to decide in July whether to extend their bond buying.
The RBNZ said its quantitative easing program may not reach the NZ$100 billion limit by the time it is due to end in June 2022, reflecting latest projections for government bond issuance. That reduced issuance was placing less upward pressure on bond yields, it noted.
New Zealand’s economy enjoyed a V-shaped recovery from last year’s pandemic-induced recession and the housing market is booming. The jobless rate fell to 4.7% in the first quarter and the central bank today forecast that inflation will accelerate to 2.6% this quarter, exceeding the midpoint of its 1-3% target range.
It expects inflation to weaken to 1.5% by mid-2022 before gradually climbing back to 2% in 2023, a faster recovery than it previously forecast.
Gross domestic product declined in the final quarter of last year and the RBNZ today projected GDP fell 0.6% in the first quarter of this year, indicating the economy may have experienced a double-dip recession. However, annual growth will accelerate to 3.4% by March next year, according to today’s projections. In February, the bank forecast growth of just 1.4% in that period.
“Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally,” the RBNZ said. “We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment.”