New Zealand set for smaller rate hike as inflation worries linger

New Zealand set for smaller rate hike as inflation worries linger
FILE PHOTO: Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016. REUTERS/Rebecca Howard

WELLINGTON : New Zealand’s central bank is expected to slow the pace of monetary tightening on Wednesday, raising rates by just 25 basis points as it keeps its focus on inflation though risks from a global banking crisis add to economic headwinds.

Investors will be closely scrutinising the accompanying commentary for any hints of an end to its tightening cycle.

The Reserve Bank of New Zealand (RBNZ) has undertaken its most aggressive policy tightening streak since the official cash rate was introduced in 1999. It has raised the cash rate to 4.75 per cent from 0.25 per cent in October 2021 and signalled plans for further hikes to get inflation under control.

An OPEC+ decision at the weekend to cut production spurred a 5 per cent rally in oil prices and reinforced the price pressures policymakers are confronting.

But since the RBNZ’s policy review in February, when it raised rates by 50 bps, the outlook has turned darker.

New Zealand’s economy shrank 0.6 per cent in the fourth quarter, dairy prices have fallen and international markets have been rocked by bank collapses. Signs that migration is picking up will help ease tightness in the labour market, a significant factor in wage inflation.

A Reuters poll found 22 of 24 economists surveyed expected the central bank to raise the cash rate by 25 basis points to 5 per cent on Wednesday, which would be the smallest increase since February 2022.

Westpac senior economist Satish Ranchhod said in a note that Westpac was expecting a 25 basis point hike but more importantly would be what the central bank signalled going forward.

“We expect the RBNZ will acknowledge recent downside developments, including the volatility in the global banking system,” Ranchhod said. “Even so, they will continue to emphasise the strength in inflation pressures and leave the door open for further hikes.”

The RBNZ April decision is a review and does not come with a full policy statement. Thus, economists do not expect to see a significant shift in tone until the monetary policy committee meets next in May.

Economists expect the central bank won’t hike as much this year and that rates will peak at 5.25 per cent rather than 5.5 per cent forecast in the February meeting. However, the central bank will not release its forecast track until its meeting in May.

“The (Monetary Policy Review) is a stepping stone between the February and May (Monetary Policy Statement). And it is in May that we expect the RBNZ to pivot,” Kiwibank said in a note.


Source: Reuters