Talk of a 50bp or 75bp hike should be sidelined, the bank says
The Reserve Bank should pull the breaks on interest rate hikes next week as the nation grapples with the devastating impact of Cyclone Gabrielle, according to Kiwibank.
Economists have been weighing whether the central bank would raise the OCR by 50 or 75 basis points on Wednesday in its attempt to curb inflation.
In a note, Kiwibank economists said RBNZ should pause its hiking cycle on Feb. 22, citing a national state of emergency, and if required, could resume tightening in April, Stuff reported.
“Talk of a 50bp, or even 75bp, hike should be sidelined,” Kiwibank said. “The comms effort in explaining such a move in the middle of a crisis would be difficult to say the least. And it’s not warranted.”
By calling a halt on an interest rate hike, wholesale interest rates would fall, and lending rates would soften, the economists said.
“Temporary relief, of all kinds, is needed in the time of crisis,” they said.
They noted that there was no longer a need to aggressively lift interest rates after a report revealed weaker-than-expected inflation at the end of last year at 7.2%, which was lower than RBNZ’s expectation for 7.5%, suggesting it may have peaked earlier than expected.
“A pause from the RBNZ next week would be welcomed by most Kiwis, and highlight that officials are cognisant of the economic damage being inflicted,” they said. “The government has called a national state of emergency. There is significant damage to key infrastructure, buildings and housing. And there will be severe damage to crops and farms. Many businesses and households have also lost income with an inability to trade during the flooding.
“Guesstimates of the total economic impact are now in the billions, not millions.”
Kiwibank noted that there would likely be a significant increase in economic activity as the nation rebuilds in the wake of the disaster, which would be inflationary, particularly in construction, which was already capacity constrained.
The economists expected RBNZ, however, to look through the impacts of the disaster, with the surge in economic activity and inflation expected to be temporary.
While Kiwibank economists believed RBNZ should press pause on interest rate hikes, they predicted the central bank to lift the OCR by a smaller 25bp or 50bp, from the current 4.25% rate, Stuff reported.
“We believe a 75bp hike is well and truly off the table,” the Kiwibank economists said.
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