OCR: What the economists (and someone else) said

BNZ - Stephen Toplis 

We saw nothing today to change our view that this tightening cycle has a long way to run before it’s all over and done with. July will be the next step along the way, September a pause and the track from thereon will be highly data dependent, with the currency the variable of most interest to us.

We were not disappointed. Perhaps the only surprise was that the Bank didn’t make more of the dependence of the interest rate track on the currency. Be that as it may, there is a clear reflection of the interdependence of these variables throughout the forecast document.

Nonetheless, the statement was definitely more hawkish than the market was anticipating as participants were looking for the RBNZ to signal some sort of respite from the tightening cycle based on the perception of a recent softening in domestic data.

We will not be changing our interest rate track as a consequence of the MPS announcement. We are forecasting further hikes in July, October and December. We think July is almost a done deal but stress that our future hikes are highly dependent on our currency track, which sees the NZD falling relatively sharply towards the end of the year.

The Reserve Bank appears to have a July hike firmly in its sights followed by a pause in September. And then a further increase in October or December. We’d assume that its track is more heavily biased towards the December option.

The RBNZ spent some time in this document recognising that the household mortgage curve was behaving in a manner that reduces the effectiveness of monetary policy. In particular, the Bank noted that fixed rate mortgages were actually falling and that the inverted mortgage curve was resulting in an accelerated shift from floating to fixed. In our opinion, this was one of the key reasons why the Bank had to remain relatively aggressive today.

ASB - Nick Tuffley

The Monetary Policy Statement was more hawkish than we expected, with little signal of an imminent pause. A key feature of the RBNZ’s forecast was the much stronger net migration outlook in the wake of recent stronger than expected inflows. Although the RBNZ acknowledged this net migration inflow would increase the supply capacity of the NZ economy, the RBNZ was very much focused on the boost this net inflow would have on housing and household demand.

We have brought forward our OCR view, putting a 60% chance on a July OCR increase.  The RBNZ is showing very little sign it is about to deviate from the path it laid out in March, which showed around 125bp of OCR hikes over 2014.  We do see a move in July as more event dependent than any of the OCR increases to date.  It essentially requires the RBNZ’s view on inflation and growth to be in line with its outlook, for net migration to be at least as strong as what the RBNZ has factored in, and for commodity prices to not weaken by any more than factored in.   On the financial market front, chances of a July hike will be influenced by the strength in the NZ dollar, and whether or not term rates (particularly mortgage rates) remain soft enough that they continue to undermine the effectiveness of the 75bp worth of OCR increases made to date.

Our full rate view is two more 25bp increases this year, in July and December, followed by three more 25bp increases in 2015 at the March, June and September MPS releases.  We still expect the RBNZ will get to the same endpoint of 4.5%.

Deutsche Bank - Darren Gibbs

As we had expected the theme of the MPS was very similar to that issued in March i.e. in the RBNZ’s opinion the outlook for the economy and inflation pressures is still one that requires the normalisation of monetary policy settings over time.

In fact, the reiteration of that theme was firmer than we and the market had expected, so that interest rate markets traded weaker (and the NZD higher) after the announcement. The RBNZ gave no ground relative to the March MPS with the central projection for the 90-day interest rate essentially unrevised across the forecast horizon (we had thought that RBNZ might have lowered the profile for this year a little).

The RBNZ’s projections still imply a further 50bps of tightening in 2014, and a further 125bps of tightening thereafter. As far as the 24 July meeting is concerned we think that a further 25bps tightening is now more likely than not, with the RBNZ’s revised forecast for the Q1 GDP report (1.1% qoq) and the Q2 CPI report (0.3% qoq) likely to be exceeded in our view.

Beyond 24 July we continue to expect the RBNZ to leave the OCR unchanged at the September and October meetings. In the absence of a notable post-election shock to confidence we continue to expect one further OCR hike late this year at the 11 December MPS meeting and a further 100bps of tightening across 2015.

Westpac - Imre Speizer

However, the content was a hawkish surprise to the market.

The earlier market debate was rather about the extent of the reduction in the RBNZ’s interest rate forecasts. On that score, the RBNZ disappointed the market which had priced in a 90-day rate of 4.53% for June 2016. The RBNZ delivered a forecast of 4.98% (quarter average) instead – much higher than expected.

The RBNZ’s interest rate track was reduced by 2bp in June 2015, 6bp in June 2016, and 9bp in March 2017.

There was no pause signal, suggesting the next hike will be in July (rather than September, our earlier expectation). The tightening cycle will continue, albeit at a trivially slower pace than signalled in March.

HSBC - Paul Bloxham

New Zealand's economy is booming and the RBNZ is responding by continuing an aggressive tightening in monetary policy.

(The RBNZ) noted that despite some signs of easing in the housing market and a recent tick down in dairy prices the 'economic expansion has considerable momentum'. This is apparent in high levels of business and consumer sentiment as well as very strong inward migration. The RBNZ is forecasting GDP growth of +4% y-o-y in Q2 2014, which is well above trend.

In response to these strong economic conditions the RBNZ also continued to project a path for the 90 day bank bill rate that implies further significant cash rate hikes from here. The path shows the 90 day bank bill rate at 4.0% by the end of this year and 4.7% by end-2015, which implies that they expect the cash rate to rise by another 125bp by the end of 2015. 

On the NZD, the RBNZ noted that they do not believe it is sustainable at these still high levels and that they expect it to move lower, in line with the recent fall in dairy prices. However, in a world of very low interest rates and ongoing unconventional monetary policy actions, an economy that is booming and needing to lift rates as a result is a beacon for international capital. Our view remains that the NZD will continue to be well supported, despite the recent fall in dairy prices. 

Indeed, the message from the RBNZ is beginning to seem a little inconsistent. They acknowledge that the economy is booming, that domestic inflationary pressures are building and they are lifting rates aggressively as a result. Surely the high NZD is helping them to hold down inflation, so a continued high NZD should be welcomed from a central bank whose mandate is to contain inflation?

We continue to expect that the RBNZ will lift rates further and agree that rates may rise by another 125bp before end-2015. We were hesitant about the RBNZ's willingness to deliver another hike before the 20 September election, although today's official statement suggests it may be less of a factor in their consideration. We expect at least another hike this year, with the risk that the RBNZ lifts rates by another 50-75bp this year as their own forward track suggests.

Greens - Russel Norman

The Reserve Bank interest rate hike means home owners with a floating rate mortgage of $250,000 will pay more than $1200 a year extra in interest than they did in March.

Home owners and those aspiring to home ownership got no assistance in last month’s Budget and today have been slammed again, plus the bank promises more hikes this year and next despite Governor Graeme Wheeler saying inflation and wage inflation is moderate.

Most families are already stretched. On a mortgage of $250,000, you will likely, by the end of this year, have $1500 less a year disposable income. Many home owners, especially in Auckland, have considerably larger mortgages than that.”

The RBNZ is virtually the only central bank around the world hiking interest rates. Some, such as the European Central Bank, are actually cutting rates.