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New Zealand Monetary Policy February 2023

New Zealand: RBNZ delivers further hike in February; strikes hawkish tone

At its 22 February meeting, the Reserve Bank of New Zealand (RBNZ) hiked the official cash rate (OCR) to 4.75% from 4.25%, marking the tenth consecutive increase. The hike, which was expected by markets, takes the OCR to its highest level since 2007.

The Bank’s decision came amid strong price pressures, elevated inflation expectations and a tight labor market. The RBNZ raised rates in an effort to limit aggregate demand and thus cool price pressures. Signs of significant—albeit moderating—demand pressures are evident from persisting labor shortages resulting in robust wage growth, with a recovering tourism sector also contributing to this. Moreover, the Bank expects inflation to increase in the near term due to the recent cyclone Gabrielle disrupting production, and sees inflation starting to fall significantly only from H2.

Looking forward, the Bank stated that “the OCR still needs to increase” in order to bring inflation within the 1.0–3.0% target band and ensure that employment returns to its maximum sustainable level.

Commenting on the release, Lee Sue Ann, economist at UOB, stated:

“As always, there is a huge amount of uncertainty regarding how the RBNZ will interpret incoming data. At this juncture, we are keeping to our forecast of three more 25 bps rate hikes at its 5 April, 24 May and 12 July monetary policy meetings. This should bring the OCR to a peak of 5.50% by 3Q23.”

Meanwhile, Francesco Pesole, FX strategist at ING, commented:

“We still think there is a high risk that the 5.50% peak rate will not be reached unless the impact of the cyclone effectively stops the deflationary process. Markets are pricing in 35bp for the 5 April meeting: it’s important to note that there are no key data releases except 4Q GDP before that date. A 25bp increase looks more likely, but we wouldn’t exclude one last 50bp move before data deteriorate in the second quarter.”

The next monetary policy meeting is scheduled for 5 April.

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