RBNZ Announced Last Rate Hike Before Pause To Assess Impacts

The RBNZ raised the OCR for a 4th consecutive time, by +25 bps to 3.5%, in July. The central bank also signaled to pause in coming months so as to assess the impact of the first 100 bps of policy normalization. Yet, the outlook of the monetary policy continues to be tightening. On the economic outlook, the central bank remained about the economy, expecting growth of +3.7% across 2014. Concerning slower growth in New Zealand’s trading partners in early 2014, the RBNZ noted it was driven by temporary factors. Policymakers also noted a more moderate inflation outlook. Kiwi, the level of which was judged as ‘unjustified and unsustainable’, dropped modestly after the announcement although the decision came in line with expectations. We forecast the RBNZ to tightening in December.

The economic outlook was generally upbeat with policymakers anticipating an annual growth rate of +3.7% over this year. They particularly noted that construction activities in Canterbury were growing strongly while strong net immigration raised housing and household demand. Despite easing in the growth momentum of New Zealand’s trading partner in 1H14, the RBNZ believed it was due to temporary factors. The RBNZ also acknowledged the decline in dairy and timber prices in recent months. It stated that these would affect ‘primary sector incomes over the coming year’. On inflation, the central bank noted that it remained ‘moderate’ but stressed that ‘strong growth in output has been absorbing spare capacity’, adding to non-tradables inflation. Policymakers also warned of the strength in New Zealand dollar, noting that the current level is ‘unjustified and unsustainable and there is potential for a significant fall’.

The monetary decision was as expected. The RBNZ stated that the rate hike of +25 bps in July should help maintain future average inflation near the +2% target mid-point and sustain economic growth. The central bank also evaluated that the growth over the first half of the year has been adjusting as a result of the tightening so far. Therefore, it believed it is ‘prudent’ for interest rates to stay at current levels for ‘a period’ before further adjustments towards ‘a more-neutral level’. The central bank reiterated that the speed and extent of rate hike would ‘depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures’.

We expect the RBNZ to pause in September and October, before resuming tightening in December. We believe this should give the central bank sufficient time to assess the effect of previous rate hikes. That said, a longer pause cannot be ruled out. Indeed, the market pricing has shifted to expect the next rate hike in March.

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