MNI RBNZ Review - April 2022
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MNI RBNZ Review – April 2022
Meeting Date: Wednesday, 13 April 2022
Link To Announcement: https://www.rbnz.govt.nz/news/2022/04/monetary-tightening-brought-forward
CONTENTS
• Page 2: MNI POV (Point of View)
• Page 3-4: RBNZ April Monetary Policy Review
• Page 5-7: Sell-Side Analyst Views
• Page 8: MNI Policy Team Insights
1|Page
Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBMNI POV (Point Of View): Stitch In Time
It was an curious case of a firm tightening step coupled with relatively cautious rhetoric. The Reserve Bank of New
Zealand front-loaded policy tightening into an outsized 50bp hike to the OCR and voiced concern about the current
price pressures, signalling the need to prevent them from becoming embedded in longer-term inflation
expectations. But the move was framed as a “least regrets” scenario amid heightened economic uncertainty.
Policymakers clearly felt the astonishing pace of price growth breathe down their necks. They noted that “both
international and domestic factors were important” in boosting inflation as price pressures were broadening to a
worrying extent. While there was no MPS and thus no formal reset to the official economic forecasts, the minutes
suggested that the Reserve Bank now sees inflation peaking “around 7 percent” in the first half of the year. For
comparison, in February MPS they predicted that inflation will run as high as +6.6% Y/Y before easing off.
In light of unabating price pressures, there was general consensus that the MPC would raise the OCR by at least
25bp, with a minority of economists calling for a half-point hike. The market was more hawkish, with the OIS strip
pricing about ~75% odds of a larger leap in the policy rate. Interestingly, policymakers explicitly recognised the
impact of market pricing on their thinking, pointing to its consistency with their proactive approach to necessary
policy tightening.
The MPC showed cognisance of downside risks to growth and sources of uncertainty. Members tipped hat to
tighter financial conditions and dampened consumer confidence. They took note of ongoing cooling in the housing
market, adding that record home building intentions will assist this adjustment. Finally, they highlighted “elevated
level of uncertainty” surrounding the impacts of Covid-19 and Russia’s invasion of Ukraine.
Given these reservations, it must have taken some bravery to raise the OCR by 50bp. The last time the RBNZ
tightened policy by that much was more than two decades ago. Indeed, the summary of the meeting strongly hinted
that the decision was (1) not an easy one to make and (2) tactical rather than strategic – which packed this
apparently hawkish outcome into a distinctly dovish box.
The RBNZ noted that the 50bp hike was a “path of least regrets.” Policymakers did not see themselves jumping
ahead of the curve in any fundamental way. Rather, they framed their decision as an opportunistic act. They judged
that a larger rate hike now would allow them to act in time to constrain rising inflation expectations and “minimise
any unnecessary volatility in output, interest rates, and the exchange rate in the future.” Since the market was
prepared for a larger hike anyway, they decided to play ball.
What is more, the language of the statement strongly suggested that front-loading policy tightening does not imply
a higher terminal level of the OCR. The Committee delivered a half-point hike “now rather than later,” not in addition
to what had been planned. To the contrary, members “remained comfortable with the outlook for the OCR as
outlined in their February Monetary Policy Statement” in defiance of market pricing which saw them withdrawing
more stimulus.
The market assessed this “stich in time” (RBNZ’s own words) approach and adjusted accordingly. Now that the
dust has settled, New Zealand’s 2-year swap rate sits 10bp lower than before the policy review. The kiwi dollar is
recouping some losses but still trades comfortably below its pre-RBNZ levels. Market reaction to the RBNZ
decision reflects the perception that the outsized move in benchmark policy rate represented bringing tightening
forward rather than a further hawkish tilt.
New Zealand’s economic calendar abounds with notable risk events as attention turns to the May Monetary Policy
Statement. By the next MPC meeting, we will see the release of New Zealand’s CPI (May 21), Labour Force
Survey (May 4), inflation expectations (May 12), and Budget 2022 (May 19) in addition to regular data on business
and consumer confidence. These will hopefully bring some more clarity, allowing the Reserve Bank to take a better
informed decision. As things stand, the implied odds of a back-to-back 50bp OCR hike are ~68% and this scenario
most definitely remains on the table.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBRBNZ April Monetary Policy Review Announcement
The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 1.50 percent. The Committee
agreed it is appropriate to continue to tighten monetary conditions at pace to best maintain price stability and
support maximum sustainable employment.
The Committee remained comfortable with the outlook for the OCR as outlined in their February Monetary Policy
Statement. They agreed that moving the OCR to a more neutral stance sooner will reduce the risks of rising
inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain
global economic environment.
The level of global economic activity continues to generate rising inflation pressures, exacerbated by ongoing
supply disruptions in large part driven by COVID-19. The Russian invasion of Ukraine has significantly added to
these supply disruptions, causing prices to spike in internationally traded commodities and energy.
However, the pace of global economic activity continues to slow. There is an elevated level of uncertainty created
by the persistent impacts of COVID-19, and clear signals that monetary and broader financial conditions will tighten
over the course of 2022. Added to this is the high level of geopolitical tension and related economic sanctions on
Russia.
In New Zealand, underlying strength remains in the economy, supported by sound balance sheets, continued fiscal
support, and strong export earnings. There has been some economic disruption due to the outbreak of Omicron.
However, the high vaccination rates across New Zealand are assisting to reduce this disruption.
Heightened global economic uncertainty and inflation are dampening consumer confidence. The rise in mortgage
interest rates – amongst other factors – have acted to reduce mortgage demand and house prices. However,
economic capacity pressures remain, with a broad range of indicators highlighting domestic capacity constraints
and ongoing inflation pressures. Employment is above its maximum sustainable level and labour shortages are
impacting many businesses.
The Reserve Bank’s core inflation measures are at or above 3 percent. Inflationary pressure is being further
accentuated by current high imported energy and commodity prices, which are lifting headline CPI inflation. The
Committee will remain focused on ensuring that current high consumer price inflation does not become embedded
into longer-term inflation expectations.
Summary Record of Meeting
The Monetary Policy Committee discussed developments affecting the outlook for monetary policy.
It was noted that global consumer price inflation is high, well above most central banks’ targets. This general
inflation pressure is due to the recent recovery in global demand running up against severe supply shortages and
trade disruption. The economic disruption caused by COVID-19 has been exacerbated by rising energy and food
prices resulting from the Russian invasion of Ukraine.
The Committee noted that global economic growth is slowing, given supply constraints, consumer price pressures
cutting into real incomes, and heightened geopolitical tensions causing investment uncertainty. Central banks
globally are also tightening, or looking to tighten, their monetary policy stances over 2022, in an effort to constrain
consumer price inflation expectations consistent with their policy targets.
Members observed that financial conditions have tightened in New Zealand, with higher interest rates, a stronger
New Zealand dollar exchange rate, and lower asset prices.
It was noted that mortgage interest rates have risen broadly consistent with the outlook for the Official Cash Rate
(OCR) in the Reserve Bank’s February Monetary Policy Statement. The Committee noted that the higher New
Zealand dollar against trading-partner currencies has assisted to partly offset higher import prices for local
consumers.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBIn discussing the underlying influences on higher domestic inflation, the Committee agreed that both international
and domestic factors were important.
Headline inflation is rising largely as a result of disrupted supply chains and higher world commodity prices. These
higher commodity prices are increasing both imported inflation and also the incomes of some New Zealand
exporters. Domestic demand pressures, relative to supply capacity, are also pushing New Zealand’s core inflation
above the Bank’s 1 to 3 percent target range.
Capacity pressures are apparent across a wide range of domestic indicators. In particular labour shortages remain
heightened, impinging on domestic economic output. Nominal wages are rising in response to these shortages, as
would be expected. However, the increasing cost of living is putting pressure on household budgets. Consumer
confidence has been declining as domestic price pressures are outpacing nominal household income growth.
The Committee discussed the outlook for labour supply with the reopening of New Zealand’s international border
underway. Members agreed that while the medium-term outlook is for ongoing net inward migration, as is the
historical norm, this level would take some time to rebuild. Near-term indicators highlight that New Zealanders are
currently leaving in larger numbers than visitors are arriving, as the border is opened in stages. The Committee
noted that net immigration is assumed to increase only slowly, eventually leading to a gradual easing in skill
shortages.
House prices have fallen from their recent high levels. The Committee viewed this as a sign that house prices are
moving towards a more sustainable level. Home building intentions remain at record levels, which will assist this
adjustment. However, construction activity faces challenges, including access to land, rising building costs, ongoing
supply chain bottlenecks, and limited access to labour. The construction sector is operating around peak capacity.
Members noted that inflation is above target and employment is above its maximum sustainable level. As such, the
Committee confirmed that further increases in the OCR are needed in order to meet their mandate.
The Committee discussed the pace and extent to which the OCR needs to rise in order to meet their inflation and
employment mandate.
Members noted that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022.
The risk of more persistent high inflation expectations has increased. The Committee agreed that their policy ‘path
of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and
minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future. The Committee
agreed to a 50 basis point rise in the OCR, consistent with this least regrets analysis.
The Committee noted that the OCR is stimulatory at its current level. Members agreed that a larger rise in the OCR
now is consistent with the forward path for interest rates outlined in their February Statement. Members also
agreed that this ‘stitch in time’ approach is consistent with near-term financial market pricing.
On Wednesday 13 April, the Committee reached a consensus to increase the OCR to 1.50 percent.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBSell-Side Analyst Views
ANZ
• As we anticipated, the RBNZ today raised the Official Cash Rate (OCR) by 50bp to 1.50%, and confirmed
there’s more to come.
• The RBNZ assessed that “underlying strength remains” in the economy, “supported by sound balance
sheets, continued fiscal support, and strong export earnings.” All up, “inflation pressures [are] ongoing”.
The Committee has its eyes firmly on the medium term, and in particular the need to ensure that inflation
expectations remain well anchored.
• As expected, the “least regrets” approach underpinned the decision to raise the OCR 50bp today: “The
Committee will remain focused on ensuring that current high consumer price inflation does not become
embedded into longer-term inflation expectations.”
• Somewhat surprisingly, there was very little discussion of downside growth risks. While we agree with the
RBNZ that “the OCR is stimulatory at its current level”, the change in rates has been very rapid. The
housing market is in full retreat, and consumers are very wary indeed.
ASB
• In what was a balanced and forthright announcement, the RBNZ hiked the OCR by 50bps to 1.50%. The
RBNZ cited their ‘Least Regrets’ policy approach as justification for moving the OCR by more now, rather
than later. The goal is to head off rising inflation expectations and minimise any unnecessary volatility in
output, interest rates, and the exchange rate in the future.
• The RBNZ was clearly troubled over the inflation outlook. The policy assessment acknowledged that the
RBNZ has revised up their inflation outlook, with annual consumer price inflation expected to peak “around
7% in the first half of 2022”. Moreover, with the RBNZ acknowledging that the risk of persistent high
inflation expectations has increased. What’s more, the NZ labour market has remained tight, with
employment deemed to be above its maximum sustainable level and labour shortages impacting many
businesses. Moreover, the RBNZ alluded to the risk of net immigration inflows remaining weak, which will
keep the NZ labour market tight but stymie growth.
• Moreover, the RBNZ judged that with market pricing factoring in decent odds of a 50bp hike (43bps was
priced in) this “stitch in time” should not unduly ruffle markets. What’s more MPC members agreed that a
larger rise in the OCR now is consistent with the forward path for interest rates outlined in their February
Statement.
• After hiking by 50bps in February, we now expect another 50bps hike in May, taking the OCR to broadly
neutral settings. After that, we envisage a gradual path of 25bp OCR hikes that will take settings into
restrictive levels, with the OCR peaking at around 3.25% in early 2023. The risks to our view are broadly
balanced. The outlook is inherently uncertain. The medium-term inflation outlook is uncertain, with the risk
that entrenched high inflation potentially seeing more OCR hikes. However, moving the OCR more swiftly
(a ‘stitch in time’ approach) reduces the need to move as much later.
Barclays
• The Reserve Bank of New Zealand (RBNZ) delivered a 50bp rate hike today, taking the official cash rate to
1.50%, from the pandemic low of 0.25%. The cash rate is now also higher than the pre-COVID level. A
50bp increment exceeded our estimate and that of consensus, while the market was pricing ~44bp of hikes
before the meeting. The tone of the statement remained hawkish and emphasised the need to contain
inflation expectations, signalling the RBNZ will continue increasing the cash rate. We now expect the OCR
to end the year at 2.5%, higher than the bank's neutral rate, with another 50bp hike when the bank meets
in May.
BNZ
• The world continues to get more bizarre by the day. We had never contemplated using the phrase a
“dovish-hike” to describe a 50 basis points rate increase (the largest rate hike in 22 years!). But that is
exactly what appears to be the case today.
• We get the 50. The RBNZ simply decided it couldn’t risk a slower move towards neutral. While we didn’t
have 50 pencilled in for this meeting, we did have one for the next. We see no need to change our May
view given the clear message the Bank has given about where it wants rates to head near term. Moreover,
the Bank, for all intents and purposes, acknowledged it was happy to follow market pricing for this meeting.
With 46 basis points priced in for May, why would they do otherwise?
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DB• Hence, apart from incorporating the extra 25 bps from today’s move, we have not changed our broader
expectations thereafter. Following May’s expected 50, we continue to expect 25 point increases in every
meeting until the cash rate peaks at 3.0% in November, one meeting earlier than previously forecast.
• Our interest rate track remains more aggressive than the central bank’s in the near term. The RBNZ’s
February track implies pause(s) along the way. Ours does not. Our initially more aggressive track, and the
fact that we believe the economy will struggle under the weight of rising interest rates, also sees us
keeping our peak in the cash rate at 3.0%.
J.P. Morgan
• The RBNZ today opted for a 50bp hike, summarizing its decision as “monetary tightening brought forward”.
The minutes similarly ran with a “stitch in time” argument, as another burst of tradables inflation triggers
front-footed defense against a possible drift in inflation expectations. The decision between 25bp and 50bp
today had looked reasonably balanced, with our view and economists’ consensus being 25bp, but markets
pricing a 2/3 chance of 50bp (taking 25bp as given). The RBNZ does not have any easy options, as activity
and housing are slowing considerably while annual inflation is not quite at the peak. This morning’s food
price data add more upside to 1Q CPI and could have been a late clincher for the 50bp move.
• Reflecting front-loaded pressure from CPI, set against more medium-term cycle concerns, we have been of
the view that more now means less later. This should mean both a flatter front-end of the curve (1s/2s
IRS), and that we are getting very close to a peak in the terminal rate pricing which has moved well in
advance of expectations for the policy rate itself. Today’s decision and language seem consistent with this,
as “moving the OCR to a more neutral stance sooner will reduce the risks of rising inflation expectations. A
larger move now also provides more policy flexibility”.
• We still expect the next move will be a 25bp hike in May, as another 50bp would likely push the economy
too far, particularly in dealing with an inflation overshoot that is mostly in tradables. The need for a 50bp
move next meeting is therefore not obvious, and the ‘stitch in time’ argument will be hard to execute
repeatedly.
Kiwibank
• We had expected the RBNZ to deliver a 25bp hike today. We were wrong. The central bank decided to
frontload two hikes into one, and has left the door open to further 50bp moves. In its path of least regrets,
ramping up rate hikes was seen as the best way to tackle the rampant rise in inflation and expectations.
• The cash rate of 1.5% is still deemed ‘stimulatory’, and more hikes are coming. We now expect the RBNZ
to deliver another 50bp move in May to a ‘neutral’ setting of 2%. But the RBNZ won’t stop there. We expect
the RBNZ to hike to 3% by November 2022 (pulled forward from 2023).
• The RBNZ is clearly focussed on inflation and inflation expectations. We expect inflation to peak at ~7% in
the first quarter, and inflation expectations will most likely rise further in the meantime. Rising expectations
clearly threatens the RBNZ’s mandate and credibility. Something the RBNZ today was clearly unwilling to
accept.
• The RBNZ has more work to do to rein in inflation and better balance the economy. The more aggressive
approach is likely to accelerate the decline in house prices as interest rates are ratcheted higher, faster.
• The RBNZ is tightening policy, by taking interest rates ABOVE normal levels. Wholesale rates markets
have factored in the higher rate path. And the wholesale funding costs for banks have risen sharply.
Mortgage rates have risen in response, and we expect to see further hikes from here.
Goldman Sachs
• The RBNZ lifted the Official Cash Rate (OCR) by 50bp to 1.5%. This was a larger increase than we and
consensus had expected, but closer to market pricing just prior to the meeting (c.75% chance of a 50bp
hike priced). The RBNZ framed today's 50bp hike largely around the need to attenuate the risks of rising
inflation expectations, but also to provide "more policy flexibility ahead in light of the highly uncertain global
economic environment" - signalling a degree of cautiousness around the medium-term growth outlook. The
statement also framed today's decision as largely a pull-forward in the pace of tightening, rather than a re-
assessment of the RBNZ's medium-term rates outlook.
• Looking ahead, given the upcoming CPI print (due 21 April) will likely show a further acceleration in
inflation and this will continue to pose upside risk to long-term inflation expectations (due 12 May), we now
expect the RBNZ to lift the OCR by another 50bp to 2% at the May meeting (vs. 25bp hike previously)
before returning to 25bp hikes from July to November, taking the OCR to 3% by year-end. We continue to
see the market pricing for end-2023 (c.4% OCR) as too aggressive.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBTD Securities
• Today's 50bps RBNZ hike is a clear indication that the Bank is intent on getting ahead of the inflation curve
to "reduce the risks of rising inflation expectations".
• The Bank's decision to hike 50bps was guided by Russia's invasion of Ukraine adding significantly to
supply disruptions (international factors) and to existing capacity constraints and an already tight labour
market (domestic factors).
• Indeed, as we highlighted in our change of call last week, the prospect that Q1'22 CPI prints with a 7
handle and the unemployment rate potentially drops below 3% in May implied the Bank's inflation forecasts
from the Feb'22 MPS were looking outdated.
• While there are no official projections accompanying today's statement, the Bank was on the front foot,
indicating that inflation in H1'22 would be around 7%, an upgrade from the 6.6% forecast in the Feb'22
MPS.
• Supporting our call for a 50bps hike in May is next week's Q1 CPI data that we anticipate will show the
headline reading rising 7.3% y/y, Q1 Labour market data (May 4th) likely pointing to the unemployment rate
printing 3% or below (RBNZ Feb'22 f/c is 3.2%) and rising 5yr RBNZ inflation expectations (May 12th).
• With more aggressive action now to get the OCR to a neutral (2% OCR) setting sooner, this removes the
need for the Bank to hike more aggressively later. This provides the RBNZ with policy optionality. While the
Bank's Feb'22 OCR track pinned the terminal cash rate between 3.25-3.50%, we retain our call for 3%
terminal rate to be reached at the end of this year.
Westpac
• The Reserve Bank’s decision today to lift the OCR by 50 basis points in one go can be chalked up as a
surprise to the extent that most economists (including us) judged that they would come down on the side of
a smaller increase. But it’s certainly no surprise that the option was on the table: 50 basis point moves are
usually reserved for extraordinary conditions, and right now we’re in the most challenging environment for
inflation in decades.
• Given the higher starting point for the OCR after today’s decision, we’ve adjusted our forecasts
accordingly. We now expect a follow-up 50 basis point hike at the May Monetary Policy Statement, with
further 25 basis point hikes at the four remaining reviews this year. This would see the OCR reach a peak
of 3% by November, instead of mid-2023 as in our previous forecast.
• Our forecast for the May review reflects the fact that the RBNZ will have a lot of fresh data to contemplate
before then (in contrast to the relative data drought ahead of the April review), and we expect that much of
it will go in the direction of exacerbating the RBNZ’s concerns about inflation. (The likely exception is the
housing market, where prices are now falling as higher mortgage rates do their work.)
• We’ve stuck with our forecast of a 3% peak in the OCR for this cycle, rather than aligning with the RBNZ’s
projection of a peak closer to 3.5%. While we acknowledge that the risks are skewed towards a higher
peak, we tend to place more weight than the RBNZ does on the link from interest rates to house prices,
and from house prices through to consumer spending. Our view is that by the end of this year, the RBNZ
will be pleasantly surprised by how much traction it’s getting on the economy.
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBMNI Policy Team Insights
MNI STATE OF PLAY: RBNZ Speeds Up Policy On Inflation Concerns
By Lachlan Colquhoun
SYDNEY (MNI) - New Zealand's central bank said on Wednesday that moving to a neutral stance sooner would
reduce the risk of rising inflation expectations amid an uncertain economic outlook as it moved to hike interest rates
by 50 basis points.
"A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic
environment, the RBNZ said in its statement.
It was this "least regrets" approach to interest rates which prompted the RBNZ to increase the Official Cash Rate
(OCR) to 1.50%, a rate the bank says is still stimulatory. In the minutes of the meeting, the RBNZ said that "this
'stitch in time' approach is consistent with near-term financial market pricing."
The RBNZ had earlier been expected to hike by 25bps, as it has done three times at every meeting since October,
but rising concerns on inflation over the last week saw many market participants expect a larger increase.
--MONETARY POLICY STATEMENT VIEWS
The RBNZ usually reserves major moves on policy for meetings which coincide with an updated Monetary Policy
Statement (MPS), with the next one due in May.
"The committee will remain focused on ensuring that current high consumer price inflation does not become
embedded into longer-term inflation expectations, the RBNZ said, adding that it "remained comfortable with the
outlook for the OCR as outlined in their February (MPS)."
In the February MPS, the RBNZ outlined a track for the OCR reaching 3% by September next year and said the
larger 50bps rise was still consistent with the forward path. The committee "agreed that moving the OCR to a more
neutral stance sooner will reduce the risks of rising inflation expectations."
On inflation, which came in at 5.9% in the last quarter of 2021, the RBNZ said it was now expecting annual
consumer price inflation to peak at "around 7%" in the first half of this year.
The bank has a core inflation target of between 1% and 3%.
The RBNZ added that it acted to "minimise any unnecessary volatility in output, interest rates, and the exchange
rate in the future."
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Business Address – MNI Market News, 5th Floor, 69 Leadenhall Street, London, EC3M 2DBYou can also read
