NEW Zealand’s central bank is poised to moderate its pace of interest-rate increases to a half-percentage point on Wednesday (Feb 22), in response to signs inflation has peaked and following Cyclone Gabrielle’s devastation.

The Reserve Bank of New Zealand (RBNZ) will raise the Official Cash Rate (OCR) to 4.75 per cent from 4.25 per cent at its first meeting of the year, according to 19 of 23 economists. Two expect another 75 basis points — after the RBNZ hiked by that amount at its previous meeting — one predicts a quarter-point move and another sees no change.

Recent data “pointed towards inflation pressures not being quite as bad as the RBNZ assumed”, said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “But inflation pressures are far too strong. We are certainly not expecting the RBNZ to go soft.”

The consensus reflects a view that the central bank’s 4 percentage points of tightening in the past 16 months is beginning to flow through the economy. While the cyclone’s hit might argue for a smaller move, the inflationary impact from its damage to food production and rebuilding costs suggests otherwise.

A smaller hike would bring the RBNZ closer to global peers that have slowed the pace of tightening as rate-sensitive sectors of their economies slow. Still, a half-point move would put New Zealand at the upper end of recent increases.

The Federal Reserve earlier this month raised by a quarter-point, slowing from a 50 basis-point hike in December and four consecutive 75 basis-point increases before that. Australia’s central bank downshifted to quarter-point moves in October, although it turned hawkish in February after having considered a pause in December.

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The RBNZ publishes its decision at 2.00 pm local time and governor Adrian Orr holds a press conference an hour later. The bank will release new forecasts in its quarterly Monetary Policy Statement, including a future track for the OCR.

New Zealand’s Finance Minister Grant Robertson expects billions of dollars of costs and a near-term dent to economic growth from Cyclone Gabrielle, which destroyed infrastructure, flooded homes and displaced thousands as it cut across the upper North Island last week.

Orchards and food producing regions were devastated, suggesting near-term shortages and price spikes. While some economists argue the disaster could prompt the RBNZ to pause, most expect it to look through the impact.

“The effects of the cyclone are more in the nature of a supply side shock,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking in Auckland. “While the disruption will boost inflation in the near term, they are not a source of sustained price rises over the medium term, which is the relevant horizon for monetary policy.”  

Investors scaled back bets on a 75-point hike as the extent of the storm damage became clear, with swaps pricing an 80 per cent chance of a half-point move.

In its November projections, the RBNZ signalled the OCR would rise to around 5.5 per cent in mid-2023 and push the economy into recession. The bank said then that core inflation was too high, employment beyond its maximum sustainable level and inflation expectations had risen.

Inflation was 7.2 per cent in the final three months of last year, coming in below the RBNZ’s 7.5 per cent estimate, and inflation expectations have eased. The central bank has a 1-3 per cent inflation target.

The labour market was also a touch softer in the fourth quarter. The jobless rate edged up to 3.4 per cent against expectations for it to hold at 3.3 per cent, while employment growth was slightly less than expected.

“The RBNZ has its foot firmly planted on the brake,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “There comes a time when such restraint is no longer necessary. We are definitely approaching that time.” BLOOMBERG