RBNZ Raised OCR To 3%, Signaled Slowdown In Pace Of Tightening

The RBNZ raised the OCR by +25 bps to 3% in June. However, the market was disappointed as the central bank explicitly said that 'the pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement'. The reference is inline with our view that the RBNZ will slow the tightening path later in the year.

Reserve Bank Governor Alan Bollard acknowledged that the world economic recovery remained 'fragile'. While growth in trading partners has proved to be stronger than predicted, future prospects for growth have deteriorated. Moreover, commodity prices have moderated. Domestic demand has been 'subdued'. Household spending grew only modestly and housing turnover declined. Recent slowdown in net immigration will further dampen consumer spending.

The central bank also addressed to recent appreciation in NZD, saying this is 'inconsistent with the softening in New Zealand's economic outlook' and 'moderation in export commodity prices'.

While the GST increase is likely to 'temporarily push annual CPI inflation above 3%', the RBNZ 'does not expect this price spike to have a lasting impact on inflation'. Yet, the central bank will monitor the 'price and wage setting behavior' of firms and households for evidence of any increase in inflation expectations. This indicates that inflation that's induced by GST increase or other fiscal policies should not affect policymakers' decision to hike rates.

Concerning the monetary policy, the RBNZ decided to raise the policy rate for a second consecutive month despite softer economic growth as the stimulus implemented during the recession was extraordinary. However, it noted that 'the pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement', signaling the pace of further rate hike will be slower than previously anticipated.

New Zealand dollar plunged to a 1-week low of 0.7204 against the dollar yesterday as hopes of aggressive rate hikes dissipated. New Zealand's 2-year swap rate also fell to 4.09% from 4.17% yesterday. Currently the market still prices in a 66% chance of a +25 bps hike at the next review on September 16. Our forecast is that the RBNZ will have 2 more rate hikes, each by +25 bps, later this year. After that, the central bank will likely pause for some time so as to gauge the impacts of tightening. The RBNZ may pause earlier than we expect, depending on how the domestic and global economies develop