RBNZ Expected To Raise Cash Rate By 25ps In May
Data Flash (New Zealand)
Deutsche Bank has brought forward its central expectation of the timing of the first RBNZ tightening move from August to May. We now expect the Bank to raise the Overnight Cash Rate (OCR) by 25 bps on 15 May when the regular Monetary Policy Statement is released.
Such a move is likely to be followed by further OCR increases of 25 bps in early July and mid-August, lifting the rate to 5.50% from its current cyclical low of 4.75%.
Our central projection assumes that the OCR will reach 6.50% by mid-2003. However, that level could be reached earlier, particularly if the NZD fails to appreciate and act as an offset to internal inflation pressure.
The change in our RBNZ call is consistent with the neutral bias expressed by the Bank after its OCR review in January and the trend in domestic and international data since then.
New Zealand employment and retail sales data have pointed to a significantly more buoyant December quarter than initially assumed by the RBNZ. Sentiment indicators and anecdotal evidence, particularly related to the housing market and tourism flows, have suggested that buoyant domestic demand conditions have continued at the beginning of this year.
Globally, confidence indicators have continued to turn up, Euroland appears to have passed the bottom of the cycle, while US consumer demand continues to surprise on the upside.
Buoyant domestic demand conditions and the improving global outlook, which will support the medium-term recovery in export growth, suggest that the domestic economy is unlikely to build up the slack required to ensure a swift reduction of underlying inflation to below 2% p.a. (i.e. closer to the mid-point of the RBNZ's 0-3% target range). While there is no generally agreed definition of core inflation in New Zealand, most measures currently point to an underlying inflation rate of around 2.5%.
The RBNZ is expected to prepare the ground for a May tightening in the 20 March Monetary Policy Statement by reflecting on its 100 bps insurance easing in response to the 11 September events. The Bank may argue that, with hindsight, the full extent of that stimulus appears not have been required, suggesting that it is prudent to gradually remove the insurance element from the level of the cash rate. That would imply a shift to a tightening bias at that point. A sequence of 25 bps moves in lifting the OCR, rather than trying to catch up with 50 bps steps, would be consistent with the measured approach the RBNZ has adopted over the past year and with the fact that the New Zealand easing cycle has been relatively shallow by international comparison.
Ulf Schoefisch, Chief Economist, New Zealand
Darren Gibbs, Senior Economist, New Zealand