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RBNZ May MPS - Instant View

Data Flash (New Zealand)

RBNZ May MPS - Instant View

The RBNZ tightened by 50 bps to 6.50% and foreshadowed 90 day rates to rise to 7.5% over the next 12 months - consistent with a cash rate of 7.25-7.50%.

A continued strong growth performance over 2000 (Q2 seen as +1.1% qoq after Q1 of +0.6% qoq) underpins the interest rate outlook, with inflation pressure rising on the back of a positive output gap. Nevertheless, the RBNZ sees inflation to rise to no more than 1.8% over coming years.

The exchange rate seen as making only a modest contribution to the tightening. A lack of a significant interest differential as in the last cycle is seen as the reason for the lacklustre NZD perfpormance.

The RBNZ expects the interest tightening to slow the economy sufficiently during the later part of the forecast period, capping the tightening cycle at around 7.5%.

We see considerable upside risks to the Bank's inflation track - with the weak currency and rising world import prices providing the greatest threat. With the RBNZ unlikely to push the interest rate tightening cycle beyond 8%, we expect the result to be higher inflation over coming years than projected today by the RBNZ - somewhere in the 2.0-2.8% range.

Market reaction within first half hour: the NZD weakened (down 30 bps to 04720), while 90 day rates firmed 4 bps to 6.81%. The long end remained unchanged.

A more detailed analysis will follow later.

Ulf Schoefisch, Chief Economist

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