RBNZ Expected to Hold Steady as Markets Eye Potential Rate Hikes

The Reserve Bank of New Zealand (RBNZ) is widely expected to maintain its official cash rate (OCR) at the upcoming monetary policy meeting, but financial markets are not ruling out the possibility of future rate hikes. The decision comes amid a complex economic backdrop where sticky inflation and robust domestic demand are being weighed against global economic headwinds.

Market Expectations and Policy Stance

According to a Reuters poll of economists, all 24 respondents predicted the RBNZ would hold the OCR at 5.5% at the February 28 meeting. However, market pricing suggests a small but non-negligible probability of a rate increase, reflecting lingering concerns over inflation persistence. The RBNZ has maintained a tightening bias, with Governor Adrian Orr emphasizing that policy will need to remain restrictive for some time to bring inflation back to the 1-3% target band.

New Zealand’s inflation rate, while moderating from its 2022 peak, remains above the central bank’s target. The latest data showed annual CPI at 4.7% in the fourth quarter of 2023, still above the 3% upper bound. Core inflation measures also remain elevated, giving the RBNZ little room to signal an early easing cycle.

Economic Indicators and Global Context

Domestic economic activity has shown signs of slowing, with GDP contracting in the third quarter of 2023. However, the labor market remains tight, with unemployment at 3.9% and wage growth running at 4.3% year-on-year. These factors complicate the RBNZ’s task, as a strong labor market could keep services inflation elevated.

Globally, central banks are navigating a similar path. The Federal Reserve and the European Central Bank have both signaled that rate cuts are not imminent, given persistent inflation pressures. The RBNZ’s stance aligns with this global theme, but New Zealand’s unique exposure to China’s economic slowdown and dairy price fluctuations adds an extra layer of uncertainty.

Implications for Borrowers and Investors

For mortgage holders and businesses, a prolonged period of high interest rates means continued pressure on household budgets and corporate margins. Fixed-rate mortgages coming up for renewal will likely face significantly higher rates than those taken out during the pandemic. Investors, meanwhile, are closely watching the RBNZ’s forward guidance for clues on the timing of any future easing cycle.

Economists at ANZ Bank note that while the RBNZ is likely to hold steady this month, the risk of a rate hike is higher than the market currently prices. “The RBNZ will want to keep its options open,” said ANZ chief economist Sharon Zollner. “If inflation proves stickier than expected, they will not hesitate to tighten further.”

Conclusion

The RBNZ’s decision to hold rates steady is widely anticipated, but the accompanying statement and press conference will be scrutinized for any shift in tone. The central bank faces a delicate balancing act: supporting a slowing economy while ensuring inflation returns to target. For now, the message is clear — policy will remain restrictive, and rate cuts are not on the horizon. The possibility of further hikes, while not the base case, cannot be entirely dismissed.

FAQs

Q1: Will the RBNZ cut rates in 2024?
Most economists expect the RBNZ to begin cutting rates in late 2024 or early 2025, but this depends on inflation data. If inflation proves persistent, cuts could be delayed further.

Q2: What is the current OCR?
The official cash rate is 5.5%, where it has been since May 2023. The RBNZ has held it steady for the past three meetings.

Q3: How does the RBNZ decision affect mortgage rates?
Mortgage rates are influenced by the OCR but also by global funding costs and bank competition. A steady OCR means floating rates will likely remain unchanged, while fixed rates could move based on swap rate expectations.