New Zealand wholesale rates shoot higher on hawkish RBNZ statement

Wholesale rates shot up sharply after a far more hawkish than expected policy statement from the Reserve Bank.

The bank raised the official cash rate by 75 basis points and forecast the official cash rate
(OCR) will peak at 5.5 percent by the middle of next year – far higher than most commercial banks’ expectations.

The Reserve Bank previously forecast an OCR spike of just 4.1 percent.

The two-year swap rate, which has a major impact on home mortgage rates, rose 28 basis points to 5.30 percent on the news, while the 10-year swap rate rose 20 basis points to 4.55 percent.

About 70 percent of the three-quarter point increase was priced in by the financial markets.

The key message from the bank’s press release read: “The [monetary policy] The Committee agreed that the OCR needs to reach higher levels, and earlier than previously indicated, to ensure that inflation returns to its target range over the medium term.

“Core consumer price inflation is too high, employment is above sustainable levels and near-term inflation expectations have risen.”

The Reserve Bank’s goal is to keep annual inflation within a range of 1 to 3 percent.

In its most recent release, Stats NZ stated that inflation was 7.2 per cent for the September year.

Imre Speizer, Westpac’s head of strategy for New Zealand markets, said part of the market reaction reflected the fact that a 75 basis point hike had not been fully priced in.

“The biggest thing, however, was the increase in the OCR track to 5.5 percent, which pretty much exceeded all forecasts by economists – certainly ours,” said Speizer.

“We thought they were going to go all of a sudden to 5.0 percent, and they’ve gone way beyond that,” he said.

“Obviously they were shaken by the inflation and inflation expectations data as well as the data [strong] work data.

“Things were too hot on those fronts — those were the key components that shook them enough to move,” Speizer said.

Adding to the highly hawkish tone was the Monetary Policy Committee’s discussion that a move of 100 basis points was under consideration.

“Regarding the risk consideration, the committee agreed that an increase of 75 basis points at this meeting was appropriate,” the committee minutes read.

“Members stressed that the cumulative tightening of monetary conditions achieved so far continues to feed through to the economy via the lagged transmission to effective retail interest rates.”

Capital Economics said in a comment it looks like the central bank is poised to send the economy into recession.

“It now seems likely that OCR will peak above our existing forecast of 5.0 per cent, but we still expect inflation to moderate faster than the bank was expecting, opening the door for rate cuts late next year said Capital Economics.