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HSBC Research_RBNZ Observer Update

RBNZ Observer Update: On hold with a tightening bias

The RBNZ left its cash rate unchanged at 2.50%. The RBNZ clearly signaled a tightening bias, although the statement was quite cautious. While they steepened the slope of their profile for the interest rate outlook slightly, they still expect that the first hike won't arrive until Q214. A key factor constraining their enthusiasm remains the high NZD, which they see as a 'headwind for the tradables sector'. With the economy at the beginning of a boom and inflationary pressures likely to build from here, we expect the RBNZ may start lifting rates a little earlier than they are currently signaling.

- The RBNZ left its overnight cash rate unchanged at 2.50%, as expected.

- On the policy outlook, the RBNZ noted ‘the Bank will increase the OCR as needed in order to keep future average inflation near the 2 percent target midpoint.’

- Their outlook for 90-day interest rates was revised slightly higher, although they continued to signal that they expect rate hikes to begin from Q2 2014 (unchanged from the September official statement).

- The central bank projects slighter stronger growth in the near-term although the growth outlook has been revised slightly lower through 2014. At the same time, the RBNZ revised down their outlook for inflation through 2014, partly reflecting a stronger outlook for the NZD.


The New Zealand economy looks to be expanding solidly, with the Canterbury rebuild, strong export prices and a housing market boom providing a significant boost to demand.

In recognition of these factors the RBNZ noted in today’s official statement that they ‘will increase the OCR as needed’ to meet their inflation objective. At the same time, however, they were fairly cautious in their forecasts. While they revised their Q3 GDP estimates higher, their outlook for growth through 2014 is now more modest and while they now see a slightly steeper upward slope to their expected cash rate profile, they still expect that the first hike will not come until Q2 next year (unchanged from their September official statement). The key factor holding back their enthusiasm remains the high NZD, which they noted is acting as a significant headwind for the external sector.

In our view, the RBNZ may need to raise rates earlier than mid-2014 as the economy has more momentum than the RBNZ is currently assuming. We expect the RBNZ may be surprised on the upside when it comes to the near term growth and inflation outlooks. The central bank is also assuming inflation remains well contained over the next 18 months, rising only gradually to the centre of the target band. We expect continued strength in the housing market, and greater spill-over into activity and inflation from the Canterbury rebuild will result in greater cost-pressure than the RBNZ is currently factoring in.

Overall, with an economy that looks to be expanding at a rapid pace, and already running up against capacity, rate hikes will soon be required to keep medium-term inflation in check. We expect the first rate hike from the RBNZ to come in Q1 next year.

Bottom line

The RBNZ kept rates unchanged at 2.50%, as expected.

The central bank was cautious about the extent of pick-up in domestic activity, continuing to signal rate hikes from around Q2 next year.

Overall, we expect strong growth and rising inflation pressure will result in an earlier move from the RBNZ, with rate hikes likely from Q1 next year.


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