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The Reserve Bank raised the Official Cash Rate by 50 basis points to 4.75%, and maintained its projection of a 5.5% peak in the coming months.

RBNZ Monetary Policy Statement, February 2023

The Reserve Bank increased the Official Cash Rate by 50 basis points to 4.75%, as was expected by most forecasters.

Surprisingly, there was almost no change to the projected OCR track compared to the November policy statement. The OCR is still expected to peak at 5.5% in the middle part of this year (albeit slightly later), and to fall only gradually from late next year.

We had expected a modest lowering of the OCR track, given that recent inflation outturns hadn’t quite lived up to the very strong assumptions that the RBNZ had made.

The options that the Monetary Policy Committee considered this time were between a 50bp and a 75bp increase. The Committee went for the smaller move, noting that the upside risks to inflation had lessened since the November review.

There was no consideration of delaying interest rate hikes in response to Cyclone Gabrielle’s impact, noting that fiscal policy could address this more effectively.

The Committee judged that the effects of the cyclone did not materially alter the outlook for monetary policy over the medium term. However, it is still early days in terms of assessing the scale of its impact, particularly in terms of the amount of rebuilding work it will generate.

The RBNZ is clearly grappling with an uncertain environment, even before the impact of Cyclone Gabrielle. It still sees upside risks to inflation in the near term. However, it also sees the risks being towards a shorter and sharper downturn in activity, and a more intense impact on household spending as homeowners roll on to higher mortgage rates.

Our current forecast is for the OCR to peak at 5.25%. In the coming months we expect to see more evidence that higher interest rates are having a restraining effect on demand, which would give the RBNZ some comfort that it has done enough to put inflation on a path back towards the 1-3% target range.

RBNZ media release

The Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term. While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated.

Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders. It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident. The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined.

The Committee’s current assessment is that over coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected. Export revenues will be negatively impacted. Monetary policy is set with a medium-term focus, and the Committee will look through these short-term output variations and direct price effects. In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.

Internationally, core inflation remains high and inflationary pressures remain broad based. However, the outlook for global economic activity in 2023 remains subdued, which is acting to lower global consumer pricing pressures, as well as demand for New Zealand’s key commodity exports. Continued growth in services exports will provide some export revenue offset.

Domestically, demand remained robust through 2022 underpinned by resilient household spending, construction activity, government spending, and a swift recovery in international tourism as the border reopened. Labour shortages remain a significant constraint on economic activity, contributing to heightened wage inflation. People are moving jobs at an elevated pace, consistent with labour shortages and strong demand.

While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation. The Committee agreed that monetary conditions need to tighten further, as indicated in the November Statement, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1 to 3% per annum target range. The Committee remains determined to achieve its Monetary Policy Remit.

BoJ board member Naoki Tamura said, "we're now in a phase where we need to scrutinise whether Japan can achieve a positive wage-inflation cycle. As such, it's appropriate to maintain monetary easing for now."

Tamura also noted that December's decision to double to yield cap was aimed at making monetary easing more sustainable, not at tightening. "At this stage, it's important to follow carefully and humbly how markets would stabilise and to what extent market functions will improve," he said.

RBNZ raises the Official Cash Rate by 50bps to 4.75% as widely expected. It also maintained hawkish bias and noted, "monetary conditions need to tighten further".

Regarding cyclone Gabrielle, it's "too early to accurately assess the monetary policy implications".. The committee will also "look through" the "short-term output variations and direct price effects" related to the weather event.

In the economic projections, RBNZ sees OCR peaking at 5.5% in Q4 2023, and stays above 5% until Q1 2025. GDP is projected to contract in Q2, Q3 and Q4 this year. Inflation is projected to drop gradually from 7.3% in Q1, but only falls back below 3% in Q3 2024.

Full statement here.

In the post meeting press conference, RBNZ Governor Adrian Orr said that all options remain on the table today, "including 25, 50 and 75 bps hikes." There was "very little discussion of a 25bp rate hike", while "most focus was on 50bp".

The Monetary Policy Committee today increased the Official Cash Rate (OCR) from 4.25% to 4.75%.

The Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term. While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated.

Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders. It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident. The timing, size, and the nature of funding the Government's fiscal response are also yet to be determined.

The Committee's current assessment is that over coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected. Export revenues will be negatively impacted. Monetary policy is set with a medium-term focus, and the Committee will look through these short-term output variations and direct price effects. In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.

Internationally, core inflation remains high and inflationary pressures remain broad based. However, the outlook for global economic activity in 2023 remains subdued, which is acting to lower global consumer pricing pressures, as well as demand for New Zealand's key commodity exports. Continued growth in services exports will provide some export revenue offset.

Domestically, demand remained robust through 2022 underpinned by resilient household spending, construction activity, government spending, and a swift recovery in international tourism as the border reopened. Labour shortages remain a significant constraint on economic activity, contributing to heightened wage inflation. People are moving jobs at an elevated pace, consistent with labour shortages and strong demand.

While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation. The Committee agreed that monetary conditions need to tighten further, as indicated in the November Statement, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1 to 3% per annum target range. The Committee remains determined to achieve its Monetary Policy Remit.

Summary record of meeting

The Monetary Policy Committee discussed developments affecting the outlook for inflation and employment in New Zealand. Overall, the economy has developed broadly in line with expectations at the time of the November Statement. Inflation is currently too high and employment is beyond its maximum sustainable level. The Committee agreed it must continue to increase the Official Cash Rate (OCR) to return inflation to target and to fulfil its Remit.

The Committee discussed recent international economic developments and their implications for New Zealand. In many countries, core inflation remains high, reflecting significant broad-based inflationary pressures. The outlook for global economic activity in 2023 remains relatively subdued. A weakening global economy is contributing to weaker demand for New Zealand's key commodity exports, such as dairy and meat, leading to a lower outlook for New Zealand's terms of trade. Continued growth in New Zealand's service exports, in particular tourism, is assumed to provide some offset to this drop in export revenue in the near term. As is an easing of travel and activity restrictions in China over the medium term.

Committee members discussed the effects of Cyclone Gabrielle and other recent severe weather events. These events have had a devastating effect on the lives of many New Zealanders. Economically, they represent a disruption to employment, trade and production, and damage to property. The economic impacts discussed by the Committee included the immediate upward pressure on some prices, the effect that higher CPI inflation could have on longer-term inflation expectations, the ability to resource and supply any increase in demand and investment in affected regions, and the longer-term impact these severe weather events will have on the productive capacity of New Zealand.

While it is too early to estimate the full economic impacts, near-term rebuilding and restocking are likely to lift the level of economic activity, and consumer prices for some goods and services will come under upward pressure given supply chain disruption and product scarcity. Weaker export volumes will impact negatively on export earnings as a result of these extreme weather events. It remains unclear how significant the impact of these events will be on New Zealand's longer-term productive capacity.

Monetary policy is set with a medium-term focus. Given this, the Committee decided to look through the short-term direct price pressures stemming from these extreme weather events, and focus on the medium-term impacts on inflation and maximum sustainable employment.

At this stage, the Committee agreed that the medium-term impacts of the severe weather events do not materially alter the outlook for monetary policy. However, significant uncertainty remains, and more accurate information on the scale of the events is becoming available by the day. Inflation remains high, employment is above its maximum sustainable level, and ongoing restrictive monetary policy settings are necessary. However, the Committee acknowledged the significant regional impacts that the severe weather events will have across New Zealand, and agreed that the Government's fiscal policy response would be more effective at addressing these, rather than any monetary policy activity.

The Committee noted that demand in the New Zealand economy remained robust through 2022, despite significant global and domestic challenges. Economic growth has been underpinned by resilient household spending, construction activity, government spending, and a swift recovery in international tourism as the border reopened. High frequency surveys of economic activity suggest domestic demand may be starting to ease. This moderation is in line with expectations outlined at the November Statement. However, demand continues to outpace supply, and this continues to be reflected in high domestic inflation.

The Committee observed that consumer price inflation in New Zealand in the December quarter remained high. Encouragingly, there was a slightly larger-than-forecast slowing in non-tradable inflation. However, CPI inflation, at 7.2 percent in the year to the December 2022 quarter, remains well above the 1 to 3 percent target range set out in the Remit. Measures of persistent or 'core' inflation have remained very high, indicating that high inflation remains broad-based. Medium- and longer-term inflation expectations have stabilised recently, but remain elevated. The potential for a persistent continuation of global and domestic supply constraints, greater persistence in core inflation and elevated inflation expectations were seen as upside risks to the economic projections.

The Committee noted that a range of measures indicated that labour shortages continue to be a significant constraint on economic activity, contributing to strong wage inflation. Measures of labour force utilisation are near record levels and firms continue to report severe difficulties finding labour. Private sector employees are also transitioning between jobs at an elevated pace, consistent with significant labour shortages and strong demand in the economy.

The Committee discussed financial conditions noting that increases in both shorter term wholesale and mortgage rates have exceeded longer term maturities. It was also noted that deposit rate increases continue to lag the increases in wholesale and mortgage rates resulting in a further widening of bank margins between lending and deposit rates. The Committee expect deposit rates to increase over the coming year incentivising savings, further dampening inflation and supporting the maintenance of current mortgage rates for a longer period.

The Committee also discussed the functioning of the New Zealand Government bond market, in the context of sales of bonds in the Large Scale Asset Purchase Programme portfolio. Measures of secondary market liquidity were generally in line with historic norms and observed volatility was consistent with trends seen in international interest rate markets.

The Committee considered the economic projections. As in the November Statement, the central projections show a decline in GDP this year. Members noted that this reduction in aggregate demand was necessary to return inflation to target over the forecast period. Members agreed that the exact timing and extent of negative GDP growth was difficult to predict, but historical evidence suggests risks are skewed toward a more concentrated period of contraction. Members also agreed that the sooner supply and demand were better matched in the economy, the lower the overall cost of reducing inflation.

The Committee discussed the resilience of household balance sheets in the context of rising interest rates and the outlook for reduced labour demand. This was seen as a downside risk – with the potential for monetary policy to have larger effects on the economy in an environment of elevated debt levels. However, it was noted that while measures of financial stress have increased marginally, they remain low. The Committee agreed that as debt servicing costs rise, spending decisions for many households will become increasingly constrained. These constraints would be felt most by recent home buyers with a high debt servicing commitment relative to their income.

The Committee agreed that the impact of rising interest rates on households' spending and saving decisions is an important channel for monetary policy. The Committee also agreed that housing market related activity was a downside risk. Projections incorporate a substantial decline in construction. However, there are significant uncertainties. Feedback from the construction industry points to a significant lack of forward activity. In contrast, rebuilding in the wake of Cyclone Gabrielle will support construction activity.

The Committee agreed that fiscal policy can also act to reduce demand in the economy. The current projection assumes government consumption and investment will fall as a share of the economy in coming years. However, members viewed the risks to inflation pressure from fiscal policy as skewed to the upside, particularly given the ongoing demand for government services in an environment of rising costs of provision. In addition, the economic impact of the Government response to recent severe weather events will depend on the scale of damage, fiscal reprioritisation decisions, timing of activity and how the fiscal costs are funded.

The Committee discussed the extent of additional monetary tightening required to achieve its Remit. Members noted the rapid pace and extent of tightening to date implies monetary policy is now contractionary. The Committee noted the long lags of monetary transmission to the economy means the impact of this tightening is still to be fully seen. Committee members agreed that the OCR needed to reach a level where the Committee could be confident it would reduce actual inflation to within the target range over the forecast horizon. Members agreed that this level of the OCR was broadly consistent with expectations at the time of the November Statement.

The Committee discussed the size of the OCR increase to be delivered at this meeting. Increases of 50 and 75 basis points were considered. The Committee assessed that, while the balance of risks around inflation remain skewed to the upside, the extent of this risk had moderated somewhat since the November Statement. As a result, a 50 basis point move balanced the need to ensure core inflation and inflation expectations fall, against the early signs that demand was beginning to moderate towards the economy's productive capacity.

On Wednesday 22 February, the Committee reached a consensus to raise the OCR by 50 basis points from 4.25% to 4.75%.

Attendees:
Reserve Bank members of MPC: Adrian Orr, Karen Silk, Christian Hawkesby, Paul Conway
External MPC members: Bob Buckle, Peter Harris, Caroline Saunders
Treasury Observer: Dominick Stephens
MPC Secretary: Adam Richardson

Key Highlights

• Crude oil price is facing resistance near the $78.50 zone.
• A major bearish trend line is forming with resistance near $78.50 on the 4-hours chart.
• Gold price is struggling to clear the $1,850 resistance zone.
• EUR/USD might slide further below the 1.0600 support zone.

Crude Oil Price Technical Analysis

Crude oil price started a fresh decline from the $80.50 resistance against the US Dollar. The price declined below the $78.50 support to move into a bearish zone.

Looking at the 4-hours chart of XTI/USD, the price settled below the $78.00 support, the 100 simple moving average (red, 4-hours) and the 200 simple moving average (green, 4-hours).

There was a sharp move below the 50% Fib retracement level of the upward move from the $72.14 swing low to $80.56 high. An immediate support is now forming near the $75.40 zone.

The 61.8% Fib retracement level of the upward move from the $72.14 swing low to $80.56 high is also near the $75.40 level. The next major support sits near the $74.00 level. Any more losses might call for a test of the $72.20 support zone in the coming days.

On the upside, the price is facing resistance near the $78.00 zone. The next major resistance is near the $78.50 zone and a bearish trend line. A clear move above the $78.50 resistance could open the doors for another steady increase towards $82 or even $85.

Looking at gold price, the bears are still active below the $1,850 resistance zone and there is a risk of another bearish wave.

Economic Releases to Watch Today

• German Consumer Price Index for Jan 2023 (YoY) – Forecast +8.7%, versus +8.7% previous.
• German Consumer Price Index for Jan 2023 (MoM) – Forecast +1%, versus +1% previous.
• German IFO Business Climate Index for Feb 2023 – Forecast 91.4, versus 90.2 previous.

• Nasdaq-100 broke pivotal support level 12235.00
• Likely to fall to support level 12000.00

Nasdaq-100 recently broke the pivotal support level 12235.00 (former strong resistance from December) intersecting with the 38.2% Fibonacci correction of the previous sharp upward impulse from January.

The breakout of the support level 12235.00 was preceded by the breakout of the sharp daily up channel from January – which accelerated the active impulse wave 1.

Nasdaq-100 can be expected to fall further toward the next round support level 12000.00 (target for the completion of the active impulse wave (iii)).

• GBPCAD broke key resistance level 1.6300
• Likely to rise to resistance level 1.6500

GBPCAD currency pair recently broke the key resistance level 1.6300, which is the top border of the narrow price range inside which the pair has been moving from the start of February.

The breakout of the resistance level 1.6300 coincided with the breakout of the 38.2% Fibonacci correction of the previous sharp downward impulse from January.

GBPCAD can be expected to rise further toward the next resistance level 1.6500 (target for the completion of the active minor correction (b)).

ECB President Christine Lagarde reiterated the plan to hike by another 50bps at March meeting. She added, "What comes after that will be data dependent. We will look at all numbers — inflation, obviously, labor cost, projections and we will determine what our monetary-policy path will be after that."

"It is quite normal that we see at the moment inflation catchup as a key theme of negotiations between unions and employers associations," she said. "At this point in time, for the whole of the euro area, we don't see this spiraling of inflation-wages, inflation-wages."

The US dollar has come off the back foot after a series of strong data and hawkish Fed talk, but is there scope for a more substantial recovery? The minutes of the Fed’s January 31-February 1 meeting out on Wednesday (19:00 GMT) will guide traders through to Friday when the all-important PCE inflation figures are due (13:30 GMT). Personal income and consumption readings for January will be vital too as the debate about whether the American economy can avoid a recession rages on.

What recession?

US economic indicators swung up in February, much to the relief of investors as not only does this ease concerns that the Fed’s aggressive rate hiking campaign is choking growth, but it also bodes well for the earnings outlook for corporate America as the worst case scenario is priced out of stocks. However, the strength of the latest batch of data has caught policymakers off guard too.

Some may be scratching their heads right now, wondering if the decision at the last meeting to shift to a slower gear was the right call. The half a million jump in January payrolls in particular must have come as quite a shock and caused angst. Add to that the smaller-than-expected drop in CPI inflation, and Fed officials are once again talking about the “significant road ahead” in their inflation battle.

Significant road ahead

Those were the words of Chair Jerome Powell, who spoke a few days after the jobs report. The minutes may therefore not reveal anything new as far as the Fed chief is concerned. But what will be interesting to see, even though the decision was unanimous, is whether there were any voting members who were hesitant about slowing down the pace of rate increases for the second straight meeting.

Two non-voting members – the Cleveland Fed’s Mester and St. Louis’ Bullard – have already expressed doubt about the need to downshift. Any hint in the discussions of that meeting that policymakers are more than ready to re-accelerate the pace of tightening should inflation prove stickier than anticipated, could put risk assets under renewed pressure.

Labour market is getting tighter

Yet, unless the tone of the minutes is vastly more hawkish than policymakers’ recent remarks, traders might be hesitant to react before they’ve had the chance to digest Friday’s slew of data. A day earlier, the second estimate of fourth quarter GDP will be released, though, no revision to the initial reading of 2.9% annualized growth is anticipated.

The weekly jobless claims on the other hand might be more crucial as they have been running below 200k for the last few weeks, pointing to ongoing tightness in the labour market. Another solid print in the jobless claims on Thursday could put investors on high alert ahead of Friday’s numbers.

US consumers are spending again

Both personal income and personal spending are expected to have bounced back strongly in January, rising by 1.0% and 1.3% month-on-month, respectively. Consumer spending sagged towards the end of 2022, but as indicated by the retail sales figures, milder weather likely spurred a rebound in January.

The highlight, however, on Friday will be the core PCE price index, which poses the biggest threat to risk appetite following the CPI surprise. The Fed’s favourite inflation gauge is forecast to have inched down 0.1 percentage point to 4.3% y/y in January, while the monthly measure is projected to have quickened slightly to 0.4%.

With investors already on edge, if the core PCE price index does not maintain a downward path then that would heighten fears of elevated inflation persisting for longer, and therefore, interest rates going higher and staying higher for longer.

Dollar’s revival not yet convincing

The question for the dollar, however, is would that be enough to rally the bulls? Although the Fed is unlikely to pause anytime soon, other central banks like the ECB are still hiking too, while the Bank of Japan may soon exit from all its stimulus policies. Still, if everything from the minutes to the data go in the dollar’s favour, there could be some healthy gains in store for the currency.

The euro, which has just slid below its 50-day moving average (MA), has found support in the $1.06 region where the 38.2% Fibonacci of the 2021-2022 downtrend runs across. Should this support crumble, the early January trough of $1.0482 would likely come into focus before attention turns to the 200-day MA near $1.0330.

In the event, though, that the minutes are no more hawkish than Fed official’s latest comments and there are no nasty surprises in the PCE inflation numbers, the euro might just be able to recapture the 50-day MA and have another attempt at the $1.10 handle where the uptrend stalled in January.

For the moment, the dollar’s recovery appears to be a short-term correction rather than a trend reversal so further positive momentum is required to push the greenback to at least the half-way point of the downward phase that began in late September to signify a sustainable rebound.