The RBNZ lifted the cash rate 25bps to 0.5% today, as expected. The lift off marks the start of the first tightening
cycle in seven years.The RBNZ’s dual mandate, targeting inflation and maximum employment, has well and truly been met. And rampant house
prices remain a cause for concern.Financial markets were (near) fully priced for the move. Traders had prepositioned and the reaction in financial markets
was relatively subdued. Interest rates continue to climb higher, and the Kiwi dollar lifted a smidge. The Kiwi dollar is
undervalued in our view..Here’s our take on the RBNZ’s MPR decision to hike 25bps.
The RBNZ lifted the cash rate 25bps to 0.5% today, as expected. The Kiwi economy has solid momentum and the RBNZ has
good reason to withdraw stimulus. And he RBNZ won’t stop here. October marks the beginning of a new chapter for the cash
rate: Onwards and upwards.
“The current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and
employment since the August Statement.” (RBNZ MPR October’21)
Looking ahead we expect today’s rate hike will be the first in a series of hikes towards 1.5% and possibly higher. As
signalled by RBNZ Assistant Governor Christian Hawkesby, a least regrets approach will be one with “considered steps”.
We expect 25bp hikes will be delivered in October, November, February and May, with the OCR reaching 1.50% by the middle
of next year. We expect a considered pause around 1.5%. Although the RBNZ is signalling a continuation to 2% in 2023.
That’s an aggressive track compared to our own forecast track which struggles to rise above 1.5%.All signs point to a strong bounce back after lockdown(s).
The Kiwi economy was on a tear heading into the Delta lockdown. Supercharged GDP growth of 2.8%
was recorded in the June quarter and the labour market had returned to full employment. Crucially, business confidence
surveys remain robust. Yesterday’s QSBO survey
showed an anticipated knock to near term confidence, due to the lockdowns, but the all-important outlook for firms’ own
activity and hiring intentions held up surprisingly well. Businesses have learnt to adapt to life in lockdown. The QSBO
survey suggests once the current disruption ends, economic activity will bounce back strongly.
Covid aside, labour shortages, supply-chain and capacity issues all point to rising inflation well above the RBNZ’s
1-to-3% target range. And the housing market has continued to flash red with record price growth – although recent
restrictions and speed limits point to a slowing market ahead.
“Capacity pressures remain evident in the economy, particularly in the labour market. A broad range of economic
indicators highlight that the New Zealand economy has been performing strongly in aggregate.” (RBNZ MPR October’21)
Despite the ongoing Delta outbreak, the medium-term outlook remains broadly unchanged. Employment is currently above the
maximum sustainable level. And there’s risk of further tightening in the labour market. Hiring intentions have
strengthened, and firms are limited to homegrown talent in their search for labour. Inflation too is accelerating. Not
only has inflation already breached the top-end of the RBNZ’s 1-3% target band, but is expected to remain elevated.
Global supply chain disruptions are proving more persistent, pushing up firms’ costs. And with strong demand, firms are
able to pass these costs onto consumer prices. There’s growing risk that businesses and households become accustomed to
higher prices, and these “transitory” prices become entrenched.
There’s enough in the inflation and labour market outlook to justify normalising policy from emergency settings. And
then there is the alarming growth in house prices. Annual house price growth hit a record high of 31% in August, despite
the lockdown and property sales plunging. Financial stability risks are growing alongside mortgage-related debt. The MPC
may not set monetary policy according to house prices, but it’s certainly the elephant in the room. Lifting the cash
rate is the coolant the housing market needs.
“The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves
contingent on the medium-term outlook for inflation and employment.” (RBNZ MPR October’21).SELL! No wait, BUY Kiwi!
Financial markets were (near) fully priced for the move today. Traders had prepositioned and the reaction in financial
markets was relatively subdued. Interest rates continue to climb higher, and the Kiwi dollar lifted a smidge.
We expect to see a lot more out of the Kiwi in coming months.
The Kiwi dollar is undervalued, in our opinion. The Kiwi dollar is a “commodity currency’, and New Zealand’s Terms of
Trade is at record highs. The Terms of Trade is the highest we’ve seen over the last 160 years. New Zealand’s purchasing
power has never been this good.
When compared to the Kiwi dollar, the economic fundamentals of New Zealand point to a lift.
And with the RBNZ ahead of most developed market central banks, interest rate differentials also play a role in
predicting the currency. The RBNZ is likely to be a year ahead of the US Fed, and possibly 2 years ahead of the RBA. The
widening interest rate differentials, in NZ’s favour, point to further upside in the Kiwi dollar.
We forecast the Kiwi flyer to climb higher and end the year closer to 75c against the USD. And the Kiwi should
outperform the Aussie and push towards, and through, 97c, possibly 98c.