NZ Reserve Bank set for crunch interest rate call

Economists expect Cyclone Gabrielle to give the Reserve Bank of New Zealand pause for thought as it continues its relentless run of cash rate hikes.

The RBNZ has lifted the official cash rate (OCR) at every meeting since October 2021, raising it from 0.25 per cent to 4.25 per cent, the highest it has been since 2009.

The latest raise was a triple-hike of 75 basis points in November last year, when governor Adrian Orr signalled his intent to keep lifting in 2023.

Consensus is the RBNZ will follow through with another meaty hike on Wednesday, when its latest monetary policy committee decision is announced.

“We are certainly not expecting the RBNZ to go soft,” ANZ chief economist Sharon Zollner said.

The bank’s tracking, last announced in November, has the OCR on a path to 5.5 per cent by the middle of 2023.

However, headline inflation data released since then came in at 7.2 per cent – still high – but below the RBNZ’s own forecast of 7.5 per cent.

Ms Zollner noted the details in January’s quarterly consumers price index data “were not as bad as feared” and that “crucially, annual non-tradables inflation came in flat at 6.6 per cent”, below RBNZ’s forecast of 7.0 per cent.

For many banks, including ANZ, it adds up to a 50 basis point increase being the most likely move, and not Mr Orr’s threatened triple-hike.

Westpac acting chief economist Michael Gordon’s prediction is also for a 50 basis point hike, noting “market opinion has also swung in that direction over recent weeks”.

“When the facts change a little, you should change your mind a little,” he said.

While inflation data could slow the RBNZ’s hawkishness, Cyclone Gabrielle is the x-factor.

The true impact of New Zealand’s biggest storm in decades is yet to be known, but Finance Minister Grant Robertson has suggested it could be around $NZ10 billion ($A9 billion)

Mr Gordon said the impact was “hard to pin down”, with a loss of business activity expected in the short term before an economic boost from the rebuild.

One bank, Kiwibank, says Gabrielle should put the brakes on fiscal tightening, but doesn’t expect the RBNZ to do so.

“We think the RBNZ should pause,” chief economist Jarrod Kerr said.

“The need to tighten aggressively from here has evaporated. Inflation is peaking at lower levels. And global inflation pressures are abating. Current circumstances warrant caution.

“But what we think they should do is not what they are likely to do. We expect to see a hike, but the discussion should be around 0 or 25bp, not 50 or 75bp.”

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