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Livesquawk - Hawkish RBNZ Poised To Help Boost Growth & Economic Recovery
Hawkish RBNZ Poised To Help Boost Growth & Economic Recovery
Source: Kiwibank Ltd.

- NZ hiking cycle is set to continue, but by 25bp or 50?

- CPI, labour markets primed for more hikes

- Is 25bps enough not to disappoint markets?

- Rate decision due Wednesday at 01:00 GMT

 

By Mack Foley

LiveSquawk News

@MrScokoMF

 

23 November 2021 | 12.00 GMT

 

London – Last month’s Reserve Bank of New Zealand interest rate hike – the first in seven years – added 25 basis points and raised the benchmark rate to 0.50%, and economists say at least another 25bps will likely be added on Wednesday as policymakers attempt to mute inflation. However, there is also those monetary policy mavens noting the chance of a 50bp increase.

 

The market consensus for a minimum 25bp hike comes at a time when inflation is at 4.9%, its fastest pace since 2011, and consumer prices been consistently outpacing the RBNZ’s peak forecast of 4%. Going forward, state owned Kiwibank said it expects inflation to peak at just under 6% in the March quarter of next year.

 

In tandem with this data comes recent labour market statistics that displayed sharp declines in unemployment and underutilisation. The latest labour market report from Stats NZ said the jobless rate fell sharply to 3.4% in the three-months to September, which also beat RBNZ expectations of 3.8%

 

Another significant factor rate-setters will need to consider in their monetary policy decision is New Zealand’s sizzling-hot housing market. With real estate prices nearly doubling over the last seven years, homes are now the most unaffordable among OECD nations. The blame for the rise has heaped upon the central bank’s extensive quantitative easing programme and the housing shortage.

 

Kiwibank analysts wrote, “There is a 40% chance now priced in that the RBNZ will lift the cash rate by 50bps this week. The local data has consistently exceeded expectations. Monetary policy is simply too loose for an economy running through full employment.” While illustrating this, the analysts said they don’t believe the central bank will hike by a full 50bps. Instead, they predicted that the RBNZ will further adjust the OCR track by again accelerating the tightening forecast and lifting the end point.

 

A Reuters survey noted that of the 23 economists surveyed, only two forecast a 50bp hike.

 

For context, the market has priced in approximately 75bps of hikes over the next two meetings and roughly 198bps over the next eight. If there is no 50bp move this meeting, experts say it will likely come at the next meeting in February, if conditions and sentiment remain unchanged.

 

When it comes to the NZD, strategists from the Commonwealth Bank of Australia said they “no longer forecast further New Zealand dollar downside,” and that the kiwi could potentially “appreciate further if the RBNZ is required to tighten more (or faster) than expected to constrain inflation.”

 

ANZ bank & HSBC analysts suggested a 25bp hike could risk upsetting markets and be overshadowed the recent Fed decision. ANZ specifically noted that traders making extra hawkish bets on the Kiwi could be failing to consider that “a softer USD has played a big part in the NZD/USD’s success” and now that Powell has been renominated, the dollar has soared, beating the currency pair back down to levels it hasn’t seen since mid-October.