Hike it like it's hot: RBNZ expected to lift rates by historic 75 bps

With inflation expected to return to the central bank's target by end-2023

By Mina Martin

19 Nov 2022

The Reserve Bank of New Zealand will raise the official cash rate, which is currently at 3.5%, by 75 basis points for the first time ever in a bid to cool down the multi-decade, red-hot inflation, economists polled by Reuters predicted.

NZ’s expected policy shift stands in contrast with neighbouring Australia’s central bank, which has already shifted down to quarter-point moves, partly due to concerns that declining housing prices could have a knock-on effect on consumer spending.

In New Zealand, house prices soared by more than 40% from the start of the pandemic to a peak in November last year but have since plunged by more than 10%, with RBNZ recently saying a continued decline “remains desirable” for long-term financial stability, Reuters reported.

Of the 23 economists polled, over 60% said they were expective RBNZ to lift the OCR by 75 bps to 4.25% on Wednesday, following a series of 50-basis-point hikes in the five previous meetings, while the remaining eight forecasted a sixth 50-basis-point hike to 4%.

“To mash up the words of an American philosopher: when inflation’s out the band, Gov, hike it like it’s hot,” said Nick Tuffley, chief economist at ASB. “Inflation pressures have appeared to heat up ... to the point that we and most forecasters expect the RBNZ will step up the pace of hikes to a 75 bp move on Wednesday.”

Ramping up the speed of an already-aggressive monetary tightening campaign now could also be partly because RBNZ's next policy decision is not due for another three months.

NZ’s biggest banks, ANZ, ASB, Kiwibank, BNZ, and Westpac, are forecasting a 75 bp hike on Wednesday, matching the recent pace of the US Federal Reserve. This event has a roughly 60% of happening, according to interest rate futures.

Out of all the respondents, a slim majority of 13 economists said they are expecting the OCR to hit 4.75% or higher by end-March – that’s 75 bps above the last poll conducted in September.

“The RBNZ has already proven that it’s not in the least afraid to go its own way, and the global tilt towards slower hikes is unlikely to play a significant part in the decision,” said Sharon Zollner, chief economist at ANZ. “We are forecasting the OCR to peak at 5%, via another 75 bp hike in February on a ‘let’s just get it done’ basis. If data cools more rapidly than expected the RBNZ could well slow the pace at that point.”

Rates were tipped to hit a peak of 4.75% and remain unchanged until the end of next year, according to the median view in the poll.

The latest RBNZ survey showed inflation is expected to soften modestly over the coming year and will be higher than previously forecasted, while a separate Reuters poll predicted inflation to return to the central bank’s target by end-2023, Reuters reported.