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RBNZ hikes rates cautiously but signals faster rises ahead

By Debabrata Das

07:25, 24 November 2021

Auckland city skyline at night
The central bank raised the official cash rate by 25 basis points on Wednesday - Photo: Shutterstock

The Reserve Bank of New Zealand (RBNZ) chose to remain cautious and increased the official cash rate (OCR) by 25 basis points (bps) but signalled a steeper rate hike cycle for the coming months.

While the central bank met the market’s expectations of a hike, it did disappoint some market hawks who were betting on a more aggressive 50 bps hike. As a result, following the RBNZ’s announcement the New Zealand dollar slipped against the Greenback as the NZD/USD was trading 0.47% lower at 0.6912 during midday trading in Asia.

“The level of global economic activity continues to rise, supported by accommodative monetary and fiscal policy settings, and the relaxation of COVID-19 health restrictions. The pace of global economic growth has ebbed, however, due to the elevated uncertainty created by the persistent Covid-19 virus,” the central bank said in a statement on Wednesday, explaining the decision.

Faster hikes ahead

Meanwhile, in its detailed monetary policy statement, the central bank said that the speed at which interest should be increased is now greater than that assumed in its August monetary policy statement.

The central bank now expects the OCR to be at 1.5% by June 2022 as compared with its previous projection of 1.2% by June 2022. Further, it expects that the OCR to be at 2.1% by December 2022, while previously it had expected the OCR to go above 2% only by September 2023.

Economists largely welcomed the decision by the RBNZ to stay cautious on Wednesday as well as its comments regarding future rate hikes.

Tighter policy needed

“The RBNZ acknowledges that monetary policy will need to go beyond ‘neutral’ and into ‘tight’ territory in order to bring inflation back on track over the medium term. And the OCR projection implies that much of the tightening will be front-loaded – indeed, taken literally, it suggests a strong chance of a 50 basis points hike at the next review in February,” said Michael Gordon, acting chief economist at Westpac, in a note.

“While the RBNZ only hiked rates by 25bps at today’s meeting, it is set to continue lifting rates next year. However, we think a slowdown in the economy will end the Bank’s hiking cycle with the OCR at 2.0%,” said Ben Udy, Australia and New Zealand economist at Capital Economics.


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Udy added that the cautious hike on Wednesday was linked to the uncertainty about how households and businesses would adapt to living with Covid-19 in the community.

Inflationary pressures mounting

Sharon Zollner, chief economist at ANZ Research, said in a note that the RBNZ recognised the rising inflationary pressure even though it was “less hawkish” than the market’s expectations.

“Overall, though, the tone of the Statement was less hawkish than the market was expecting, though the RBNZ’s forecasts for growth, employment and the degree of inflationary stretch in the economy were all revised up significantly. There’s certainly a lot more to the current inflation pulse than one-off cost bumps,” she said in a note.

“In short, there’s a lot of inflation pressure out there and the need for tighter policy is self-evident, but there is also an underlying fragility due to both debt loadings and our reluctant transition to living with Covid-19 in our communities,” the note added.

Banks transmitting rate hikes

With the RBNZ’s rate hikes, home loans have already started getting dearer in New Zealand. Soon after the RBNZ’s statement, Australia and New Zealand Banking Group’s (ANZ) arm in New Zealand said it had raised the flexible and floating home loan rates by 0.20%.

Separately, ANZ as well as peers Bank of New Zealand and Kiwibank had also paused low-deposit home loans with the banks not approving home loans for those applications whose loan-to-value ratio was greater than 80%.

Read more: New Zealand central bank raises interest rates

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