RBNZ Observer Update: Hiked again and there's more to come

The RBNZ Observer Update: Hiked again and there's more to come

The RBNZ lifted its cash rate by another 25bp to 3.25% today, as expected. The economy is booming and despite a high NZD the central bank needs to continue to shift its rate setting back towards normal. Notwithstanding some recent signs of slowing in the housing market and lower dairy prices they noted that the economic expansion has ‘considerable momentum’. Their forward projections for the 90 day bank bill imply that they expect at least another 50bp of hikes this year and a total of 125bp cash rate hikes before end-2015. This path is only slightly lower than that published in the previous quarterly statement. We remain of the view that the cash rate could rise by another 125bp by end 2015.

Facts

- The RBNZ lifted its cash rate by 25bp for the third time this year to 3.25%, as expected (13 of 15 economists expected a hike, including HSBC).

- Their forward looking path for the 90-day bank bill rate was revised down a little in the out year. The path now has a rate of 4.0% by end 2014 and 4.7% by end-2015, where the old path had a rate of 4.0% by end 2014 and 4.8% by end-2015.

Implications

New Zealand's economy is booming and the RBNZ is responding by continuing an aggressive tightening in monetary policy. Today the RBNZ lifted its cash rate by another 25bp to 3.25%, the third tightening this year so far.

They noted that despite some signs of easing in the housing market and a recent tick down in dairy prices the 'economic expansion has considerable momentum'. This is apparent in high levels of business and consumer sentiment as well as very strong inward migration. The RBNZ is forecasting GDP growth of +4% y-o-y in Q2 2014, which is well above trend.

In response to these strong economic conditions the RBNZ also continued to project a path for the 90 day bank bill rate that implies further significant cash rate hikes from here. The path shows the 90 day bank bill rate at 4.0% by the end of this year and 4.7% by end-2015, which implies that they expect the cash rate to rise by another 125bp by the end of 2015.

On the NZD, the RBNZ noted that they do not believe it is sustainable at these still high levels and that they expect it to move lower, in line with the recent fall in dairy prices. However, in a world of very low interest rates and ongoing unconventional monetary policy actions, an economy that is booming and needing to lift rates as a result is a beacon for international capital. Our view remains that the NZD will continue to be well supported, despite the recent fall in dairy prices.

Indeed, the message from the RBNZ is beginning to seem a little inconsistent. They acknowledge that the economy is booming, that domestic inflationary pressures are building and they are lifting rates aggressively as a result. Surely the high NZD is helping them to hold down inflation, so a continued high NZD should be welcomed from a central bank whose mandate is to contain inflation?

We continue to expect that the RBNZ will lift rates further and agree that rates may rise by another 125bp before end-2015. We were hesitant about the RBNZ's willingness to deliver another hike before the 20 September election, although today's official statement suggests it may be less of a factor in their consideration. We expect at least another hike this year, with the risk that the RBNZ lifts rates by another 50-75bp this year as their own forward track suggests.