NZ central bank to hike by 25 bps, risk grows of higher peak for rates

A security guard stands outside the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand

By Lucy Craymer

WELLINGTON (Reuters) – New Zealand’s central bank is expected to deliver a 25-basis point hike on Wednesday, but the focus will be on whether the policy rate will peak at a higher level than previously thought in the wake of a more stimulatory budget last week.

After surprising financial markets with a 50-basis-point (bps) hike to 5.25% in April, the Reserve Bank of New Zealand is now under pressure to moderate its tightening pace as the economy teeters on the verge of a recession.

Yet, while back in February the RBNZ forecast the cash rate would peak at 5.5%, a growing minority of economists expect a further tightening is possible in July.

That view has gained currency after last week’s government budget showed increased spending, while signs the house market is turning, surging migration and slipping mortgage rates have also raised the risk of another rate hike beyond Wednesday’s policy review.

“The (relatively) happy place to sit and “watch, worry and wait” keeps inching just out of reach,” said ANZ economists in a note. ANZ now expects a 25-basis point hike this week and another increase in July.

Four economists in a Reuters poll of 21 economists now expect the cash rate to reach 5.75 or higher. Fourteen expect rates to hold at 5.50% next quarter.

A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has remained singularly focused on curbing inflation, lifting rates by 500 basis points since October 2021 – the most aggressive tightening streak since the cash rate was introduced in 1999.

Inflation has eased back from three-decade highs to 6.7% but remains well above the central bank’s 1% to 3% target band.

Kiwibank economists said in a note that while the data has turned in the RBNZ’s favour, a few inflationary forces are working against policymakers.

“The surge in net migration, in particular, is seen as a net-positive for demand and therefore inflation,” they added.

After the April surprise, markets remain wary of another outsized 50-basis-point rate hike this week. The money market is now pricing 39 basis points of hikes, up from 20 basis points last week.

Westpac economists said they see a strong case for an upgrade in the RBNZ’s own assessment of the OCR peak.

“The key questions are the extent of the reassessment they do now and the balance of risks they portray around that OCR (official cash rate) profile looking forward,” they said

(Reporting by Lucy Craymer; Editing by Shri Navaratnam)