OCR hikes official cash rate to record high

The RBNZ hiked the official cash rate to 8.25% this morning, as broadly expected by 11 of the 16 economists surveyed by Bloomberg. The RBNZ again pointed to surging dairy prices, a tight labour market, high capacity usage, and rising oil and food prices as 'sustained inflationary pressures'. In the accompanying statement the RBNZ highlighted these reasons as "why we are increasing the OCR today." The overall tone of the statement was, however, more 'neutral' than that in previous statements, and any risk of further tightening is now conditional on a further moderation of private sector borrowing, and a continued easing of pressures on resources.

The key line from today's statement was the bottom line: "New Zealanders have been showing early signs of moderating their borrowing. Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation." This phase appears to have been inserted with the intention of making the statement more 'neutral' whilst maintaining a tightening bias, minimizing the impact on the rates market, and curbing NZD strength. Going forward, watch for further RBNZ currency intervention. Three of the four hurdles for currency intervention - 1.) currency is 'exceptionally high'; 2.) currency is 'unjustified'; and 3.) intervention is consistent with the PTA - are clearly ticked, and the RBNZ will be waiting for an 'opportune' time (the fourth and final hurdle) to hit the market.

The statement also gave a subtle warning to all farmers not to load up on debt in light of the record Fonterra dairy payout. RBNZ officials remain concerned that the higher the dairy payout, the higher the propensity for farmers to consume, and the longer the dairy price windfall is perceived to last, the more willing farmers will be to acquire additional debt. Essentially, RBNZ officials are hinting at farmers to take a conservative approach to borrowing and run-down debt accumulated over recent years.

JPMorgan maintains the view that the RBNZ will remain on hold in September and October, but flags that this is not a one-way bet and there is still a 20-30% risk of another tightening.

The hurdles for another tightening have now been set much higher into the September and October meetings

The key data points leading into the September decision will be house prices, retail sales, wages growth and credit growth. There are a number of economic data releases before the September MPS, none of which could push the RBNZ into tightening again in solidarity. Three of the most critical glamour statistics - CPI (nontradables), NZIER QSBO, and (to a lesser extent) 2Q GDP - are not due for release until after the September decision (see list below), making the chance of a tightening at the October meeting the more risky of the two.

Financial market reaction: After initially rising 20pts to US 80.55 cents, the Kiwi dollar made a short-lived dive below US 80 cents before recovering to US 80.13 cents.

ends

© Scoop Media