New Zealand’s central bank poised for fifth half-point rate hike

Bloomberg

New Zealand’s central bank is poised to raise interest rates by half a percentage point for a fifth straight time, and some economists are tipping it will need to keep tightening well into next year as an aggressive Federal Reserve weakens the kiwi dollar.
The Reserve Bank will lift the Official Cash Rate to 3.5% from 3% in Wellington, according to 20 of 22 economists surveyed by Bloomberg. Most expect another half-point increase at the final meeting of the year in November, and some now predict the cash rate will need to keep rising to 4.5% or higher in 2023.
The RBNZ has been at the forefront of global rate hikes but the Fed has closed the gap with three 75-point moves, causing the greenback to surge against most other currencies. The New Zealand dollar’s 6.3% slump the past month, at one point reaching a 13-year low, may fan inflation by making imports more expensive.
“The imported component of inflation won’t recede as quickly as we thought,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. in Auckland. Last week, he raised his forecast for next year’s OCR peak to 4.5% from 4%.
Globally, central banks continue to signal further rate hikes will be needed to regain control of inflation. The Fed last month forecast its benchmark federal funds rate would reach 4.6% in 2023 from the current 3-3.25% target. Still, the Reserve Bank of Australia took economists and investors by surprise, raising its cash rate by only 25 basis points instead of the 50 that was widely expected.
The RBNZ decision is an interim review rather than a quarterly Monetary Policy Statement, so the bank won’t issue new forecasts and there is no press conference with Governor Adrian Orr.
Economists will instead scrutinize the RBNZ’s statement and the Monetary Policy Committee’s record of meeting for signs policymakers are growing more concerned about inflation risks.
In its August projections, the RBNZ signaled the OCR would rise to around 4% in early 2023 and that this would be enough to return inflation to its 1-3% target band in 2024. Annual inflation was 7.3% in the second quarter — the fastest in 32 years.
Of the 17 economists in Bloomberg’s survey who gave long-range projections, eight now expect the OCR will need to move beyond 4% next year. That includes four who forecast 4.5% and one, ANZ Bank New Zealand, which predicts a peak of 4.75%. Investors also see the benchmark rising to at least 4.75% in the second half of 2023, swaps data show.
New Zealand’s tight labor market and the economy’s robust recovery from a wave of Covid infections earlier in the year reinforce the need to keep raising borrowing costs. In the second quarter, the jobless rate was 3.3% — just off a record low — while economic growth was an unexpectedly strong 1.7%.
Falling house prices and an erosion of business confidence have also failed to take the sting out of year-ahead inflation expectations, which are hovering around 6%.
Nearly two-thirds of firms expect to raise prices in the fourth quarter even as the economic outlook deteriorates, a New Zealand Institute of Economic Research survey showed Tuesday.
Still, Orr last week described the central bank’s tightening cycle as “very mature” and “well advanced.”
He also said easing supply constraints and a slide in energy prices were helping to offset some of the impacts of the weaker exchange rate on import prices.
Policymakers have “a little bit more to do before we can drop to our normal happy place, which is to watch, worry and wait for signs of inflation up or down,” Orr said.
Some economists also warn that slowing global growth in the face of soaring borrowing costs may eventually be a greater threat than inflation.
“It has been a very long time since the world has witnessed such a synchronized tightening cycle,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington, who expects the OCR to peak at 4.25%. “The medium-term pressure on global inflation must be sharply downward. The RBNZ can’t ignore this.”