RBNZ Lifts The Cash Rate By Another 0.5%. The (huge) Impact On Households Will Be Felt Over Spring-summer
RBNZ hiked the cash rate 50bps to 3.5%, for the fifth consecutive meeting. The decision was in line with our view and that of the markets’. The cash rate has been pushed well through neutral (2%) and into truly restrictive territory. The RBNZ reiterated its resolve to break inflation back down to 2%.
- The statement was punchy and hawkish, and highlighted the need to demand destruct inflation back to target. The committee actually contemplated hiking the cash rate by 75bps. “The Committee considered whether to increase the OCR by 50 or 75 basis points at this meeting. Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required. Other members emphasised the degree of policy tightening delivered to date.” RBNZ
- We still expect the RBNZ to hike to 4%, and pause. Global demand is easing with probable recession risks in the northern hemisphere.
Here’s our take.
The RBNZ maintained a determined and resolute policy stance. The committee actually contemplated hiking the cash rate by 75bps. “The Committee considered whether to increase the OCR by 50 or 75 basis points at this meeting. Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required. Other members emphasised the degree of policy tightening delivered to date.” RBNZ
Inflation needs to fall, and by quite a bit. The focus domestically is purely one of destructing demand to break the back of the inflation beast. More rate rises are required for mandates to be met. We have at least another 50bps of tightening to come.
“The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation is too high and labour resources are scarce.” (RBNZ)
We continue to forecast a peak in this cycle of 4.0%. Although the risk is clearly tilted towards even more policy tightening to 4.5%. We believe the RBNZ is getting significant traction from its rate hikes to date. The forward-looking indicators are showing a significant slowdown in growth. Both business and consumer confidence has hit recessionary levels, although there was a slight recovery in business confidence yesterday. And the housing market is in full retreat.
We are becoming increasingly wary of the consequences such tightening will bring. Most outstanding mortgages roll onto much higher rates in the next 6 months – over spring and summer - the busy period for housing activity. The cost of home ownership is increasing, fast. Mortgage interest rates were around 2-2.5% early last year. Mortgage rates are now around 5.5-6%. They have more than doubled. For example, the extra 3% (300bps) on a mortgage of $800,000 equates to an increase in interest repayments of $24,000 per year. So total interest repayments in this example have gone from $20,000 per year to $44,000. There will be a profound impact on discretionary spending – by RBNZ design. Unfortunately, the RBNZ needs to see this pain in households before they are confident they’ll beat inflation back down to 2%.
We also put a larger weight on international forces. The swift and sizable increases in global interest rates are likely to cause a recession in parts, with the risk of a larger, global recession. Highly probable recessions in the UK and Europe, alongside a possible recession in the US will have a profound impact on Asian growth. And China is already struggling. The outlook for our trading partners has weakened. And we will feel it directly from China (our largest trading partner) and indirectly from Australia (or second largest trading partner).
Half of the inflation seen over the last year was generated offshore. The sharp slowdown in global growth will bring weaker commodity prices. And global shipping costs are already falling (click here). Tradables (imported) inflation is set to decline quite quickly into 2023. Although the recent decline in the Kiwi currency will frustrate the move lower, at least in the near term.
The financial market reaction was swift, and is still ongoing. Wholesale interest rates rose a rather muted ~5bps following the announcement. The Kiwi dollar rose around 40pts and gained even more against the Aussie dollar. The Aussie was under pressure following the dovish decision by the RBA yesterday to deliver 25bps (rather than the 50bps expected).