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RBNZ raises OCR by 25 bps to 5.50% - hawkish tone

Data Flash (New Zealand)

OCR increased to by 25 bps to 5.50%.

Upward revision to interest rate track. 90 day rate now expected to peak at 7% in early 2003 (6.25% last time).

Revision due to stronger-than-expected growth momentum.

Upside risks are migration and global growth, while farm incomes provide downside risks.

NZD crucial for interest rate track. If it appreciates faster than assumed (TWI to 54.5 by early next year), interest cycle may have lower peak. RBNZ notes that currency in general has lower impact on inflation than estimated in the mid-90s.

We interpret the Statement as relatively hawkish, with a rate increase of 25 bps expected in July.

There is also a good chance that the RBNZ may step up the tightening pace to 50 bps in August. However, our central call remains a 25 bps for August, considering that the NZD is already close to levels the RBNZ expects for early next year and the upward momentum in the NZD is still intact.

We also expect some signs of a slowdown in the domestic growth momentum to emerge in Q3, causing the RBNZ to maintain the 25 bps pace in August. We continue to expect the OCR to peak at 6.5% early next year.

Ulf Schoefisch, Chief Economist

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