Key Takeaways
- • The Reserve Bank of New Zealand (RBNZ) is widely expected to raise the official cash rate (OCR) by 25 basis points to 3.0 percent, its third consecutive hike and the highest OCR level in a year, reversing a previously signalled pause.
- • BNZ senior economist Doug Steel said oil prices are much higher and the currency materially lower than the RBNZ assumed in September, making a pause a material shock to markets.
- • Headline inflation slowed to 3.7 percent for the year ended September, but economists warn it is only temporary and could return toward 4.5 percent, with core inflation proving stubborn.
- • Economists split on the path ahead: ANZ lightly pencilled in a December pause, while Westpac forecasts hikes in December and February to 3.5 percent, with further increases possible.
- • The decision falls ten days before the 7 November general election, but RBNZ Governor Anna Breman has said the election is not a factor in the decision.
Summary
The Reserve Bank of New Zealand (RBNZ) is set to raise its benchmark official cash rate (OCR) by 25 basis points to 3.0 percent, despite having previously signalled a pause. The decision, due at 2pm with the Governor's webcast at 3pm, would be the third consecutive rate rise and the highest OCR level in a year. The move comes as a surge in fuel prices, a weaker currency and stubborn core inflation make a pause risky, according to economists cited by RNZ.
BNZ senior economist Doug Steel said much had changed since the RBNZ's September decision. "Oil prices are much higher, and the currency is materially lower than the Bank assumed as it looks to get on top of stronger inflation," he said. Steel noted that headline inflation for the year ended September was better than expected at 3.7 percent, but that core inflation remained stubborn and the headline rate could surge back to 4.5 percent. He added that it would be a material shock to markets if the RBNZ did not lift the OCR.
ASB senior economist Mark Smith expected the monetary policy committee to take the path of least resistance and hike, possibly in a split decision, given upside inflation risks. He warned the timing was unfortunate and could dampen economic activity and slow labour market improvement, and said the RBNZ would likely signal that the anti-inflation fight is not yet over. Inflation is expected to return above 4 percent next year, according to the reporting.
Views on the outlook for further moves diverge. ANZ chief economist Sharon Zollner said the path was open and uncertain, having lightly pencilled in a December pause, with 3 percent a comfortable place to sit. Westpac chief economist Kelly Eckhold forecast increases in December and February next year, taking the OCR to the RBNZ's neutral zone at 3.5 percent, with further hikes in June and September to a high of 4 percent. RNZ put the chance of a December rise at roughly 50-50.
The decision lands just ten days before the 7 November general election. Governor Anna Breman said last month that the proximity of the decision to the election was not a factor, stating, "We focus on the mandate and the election does not come into that decision."
BNZ senior economist Doug Steel said much had changed since the RBNZ's September decision. "Oil prices are much higher, and the currency is materially lower than the Bank assumed as it looks to get on top of stronger inflation," he said. Steel noted that headline inflation for the year ended September was better than expected at 3.7 percent, but that core inflation remained stubborn and the headline rate could surge back to 4.5 percent. He added that it would be a material shock to markets if the RBNZ did not lift the OCR.
ASB senior economist Mark Smith expected the monetary policy committee to take the path of least resistance and hike, possibly in a split decision, given upside inflation risks. He warned the timing was unfortunate and could dampen economic activity and slow labour market improvement, and said the RBNZ would likely signal that the anti-inflation fight is not yet over. Inflation is expected to return above 4 percent next year, according to the reporting.
Views on the outlook for further moves diverge. ANZ chief economist Sharon Zollner said the path was open and uncertain, having lightly pencilled in a December pause, with 3 percent a comfortable place to sit. Westpac chief economist Kelly Eckhold forecast increases in December and February next year, taking the OCR to the RBNZ's neutral zone at 3.5 percent, with further hikes in June and September to a high of 4 percent. RNZ put the chance of a December rise at roughly 50-50.
The decision lands just ten days before the 7 November general election. Governor Anna Breman said last month that the proximity of the decision to the election was not a factor, stating, "We focus on the mandate and the election does not come into that decision."
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