Has the RBNZ just set a precedent?
At the end of 2021, the RBNZ was the most hawkish central bank of the G8 currencies. It has hiked again by 50bps, but crucial it has raised the terminal rate to nearly 4%. This is the RBNZ saying that it needs to do more to tackle inflation quickly. Is this a sign of things to come? Will other central banks now follow?
Heading into the meeting STIR markets had priced in a 100% chance of a 50bps hike. That was expected. However, the raising of the Official Cash Rate (OCR) and Governor Orr’s forecast was what got all the attention and lifted the NZD higher.
The stated aim of the RBNZ is to raise the OCR rate (interest rate) to a level that brings consumer inflation down. Here is a signal of its intention:
- OCR for Sep 2022 now at 2.68% vs 1.89% prior,
- OCR for June 2023 now at 3.88% vs 2.84% prior,
- OCR for Sep 2023 now at 3.95% vs 3.1% prior.
And then the RBNZ sees the interest rate dropping in June 2025:
- OCR for June 2025 now at 3.5% vs 2.6% prior.
The RBNZ recognised that those with high debt levels would be pressured by the rising interest rate levels. However, Governor Orr stated that he was confident that households can withstand higher rates. The RBNZ stressed that the risk of doing too little too late is worse than doing too much too soon.
This is a bullish development from the RBNZ and means the NZD has reasons for more strength as the RBNZ hike rates. AUDNZD selling makes sense as long as the RBNZ looks like being more aggressive than the RBA in terms of hiking rates. The main risk to this outlook is if New Zealand’s economy slows and can’t take higher interest rates or if the RBA needs to start hiking quickly too. Another key point to note is if the RBNZ is getting tougher on inflation, will other central banks follow too?