New Zealand’s central bank is poised to signal a potential shift in monetary policy, moving away from expectations of further interest rate cuts and towards a possible rate hike later this year. While the Official Cash Rate (OCR) is expected to remain unchanged at at this week’s meeting, Governor Anna Breman is anticipated to adopt a more hawkish tone, acknowledging growing inflationary pressures and a strengthening economy.
The change in outlook comes as economists reassess the economic landscape following surprisingly firm inflation data. The December quarter CPI is currently tracking higher than previously forecast, with risks tilted to the upside, according to Westpac IQ Economics. While volatile components like travel contributed to the increase, there are also indications of rising core inflation – a more concerning trend for policymakers.
“The RBNZ will likely be wary of a meaningful further tightening of monetary conditions at this stage, as it would risk killing off the nascent recovery,” noted Zollner. “it is entirely appropriate for the RBNZ to pivot from signalling the odds of further cuts to signalling the potential timing of the first hike.”
Market pricing already reflects expectations of a rate rise, with some anticipating a move as early as September. However, the central bank is expected to manage these expectations carefully, opting for a gradual shift in guidance rather than a sudden shock. Westpac chief economist Kelly Eckhold believes the RBNZ will aim to signal a strong chance of a rate rise in December, followed by another in February , avoiding any attempt to push for an earlier start to tightening than the market has already priced in.
“We don’t think the RBNZ will be trying to scare the horses,” Eckhold said. “the RBNZ is more likely to opt for more dovish messaging than more hawkish messaging.”
The shift in tone comes after a significant rate cut in October , when the central bank surprised markets with a 50-basis-point reduction in the benchmark rate, signaling concerns about the fragility of the New Zealand economy. That move now appears to be under review, as economic data suggests a more robust recovery is underway.
Governor Breman’s debut on the inflation front will be closely watched. ASB economist Wesley Tanuvasa highlighted the importance of her characterization of the data, noting that her commitment to increased transparency may lead to greater openness regarding the views of Monetary Policy Committee members in future meeting records. “RBNZ judgment on inflation will be pivotal,” Tanuvasa said.
While BNZ economists forecast a September hike, head of research Stephen Toplis doesn’t anticipate the RBNZ will explicitly endorse that timeline at the upcoming meeting. He expects the central bank to acknowledge the pick-up in growth and the higher starting point for inflation, while still expressing confidence that inflation will eventually return to the mid-point of its target band.
Despite the firmer inflation data, the RBNZ faces a delicate balancing act. The labour market and housing market are not currently exhibiting inflationary pressures, allowing the central bank some room to “give growth a chance” while keeping its options open. The key will be navigating the risks of both stifling the recovery and allowing inflation to become entrenched.
The upcoming meeting will provide crucial insights into the RBNZ’s evolving assessment of the economic outlook and its likely path for monetary policy in the months ahead. The market will be scrutinizing Governor Breman’s communication for any subtle shifts in guidance that could signal the timing and pace of future interest rate adjustments.
