New Zealand poised for fifth half-point rate hike as Fed sinks kiwi dollar
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 of New Zealand (RBNZ) will lift the Official Cash Rate (OCR) to 3.5 per cent from 3 per cent on Wednesday (Oct 5) 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 per cent 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 per cent slump over 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 in Auckland. Last week, he raised his forecast for next year’s OCR peak to 4.5 per cent from 4 per cent.
Globally, central banks are continuing to tighten at pace, with the Fed last month forecasting the benchmark federal funds rate would reach 4.6 per cent in 2023 from its current 3-3.25 per cent target. Later Tuesday, the Reserve Bank of Australia is tipped to hike by a half point, taking its cash rate to 2.85 per cent.
Wednesday’s RBNZ decision, due at 2.00 pm local time, 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 scrutinise the RBNZ’s statement and the Monetary Policy Committee’s record of meeting for signs policymakers are growing more concerned about inflation risks.
August projections
In its August projections, the RBNZ signalled the OCR would rise to around 4 per cent in early 2023 and that this would be enough to return inflation to its 1-3 per cent target band in 2024. Annual inflation was 7.3 per cent 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 per cent next year. That includes four that forecast 4.5 per cent and one, ANZ Bank New Zealand, which predicts a peak of 4.75 per cent. Investors also see the benchmark rising to at least 4.75 per cent in the second half of 2023, swaps data show.
New Zealand’s tight labour 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 per cent - just off a record low - while economic growth was an unexpectedly strong 1.7 per cent.
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 per cent.
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 on 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 synchronised tightening cycle,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington, who expects the OCR to peak at 4.25 per cent. “The medium-term pressure on global inflation must be sharply downward. The RBNZ can’t ignore this.” BLOOMBERG
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Delivered to your inbox. Free.
Share with us your feedback on BT's products and services
