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RBNZ To Lift Policy Rate Again after Strong Inflation

The RBNZ is ready to increase the policy rate again this week. The question is whether, in light of the latest strong inflation data, whether the hike is +25 bps or +50 bps. We continue to expect the former. Several banks have lifted the mortgage rates, while bond yields have risen after October’s rate hike. With considerable tightening effects felt in the market, policymakers will likely normalize its monetary policy measures in a gradual manner.

Economic data since the last meeting have pointed to robust economic recovery in New Zealand. For instance, the unemployment rate fell -0.6 ppt to 3.4% in 3Q21, beating consensus of +3.9%. The decline in the unemployment rate despite higher participation rate was in particular remarkable. The number of employment gained +2% q/q and +4.2% y/y, compared with consensus of +0.4% and +2.7%, respectively. Inflation again surprised to the upside. Headline CPI accelerated to +4.9% y/y in 3Q21, from +3.3% prior. This has exceeded the consensus of an already-strong +4.2%. The 2-year-ahead inflation expectations also strengthened further to +2.96% y/y for 4Q21, from +2.27% previously. This marks the highest since 2Q11. Meanwhile, the one-year inflation also accelerate to +3.7% from +3.02% prior.

Strong inflation and job market are pushing the central bank to continue its policy normalization. Last month, the RBNZ increased the OCR by +25 bps to 0.5%, the first time in 7 years. Policymakers pledged to tighten further in coming months as inflation pressure continued to exceed target. Economic recovery has remained robust and acceleration of inflation proves faster than previously anticipated. The market has fueled speculations of a +50 bps hike this month, although the consensus remains +25 bps. We also anticipated a +25 bps rate hike. Indeed, the market has done part of the tightening job for the RBNZ. Mortgage rates have risen by around +100 bps so far. The fourth quarter increase is expected to be one of the largest quarterly increases since the OCR was introduced in 1999. Meanwhile, the RBNZ can adjust the OCR to, say, 3% by the end of the forecast, from 2% in August projection. This could also have some tightening effect to the market.

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