RBNZ to hike rates in mid-2018 - BNZ

With some trepidation, Stephen Toplis, Head of Research at BNZ, suggests that they are now formally pushing back their expectation of a first RBNZ rate hike to mid-2018 from Q1 2018.

Key Quotes

“There remains huge uncertainty around the timing of the move and we are certainly not ruling out a February rate hike. However, we now think looking for a May (or August) move is a better reflection of our central view of the RBNZ’s reaction function with equivalent risks of an earlier or later move. Our view remains significantly more aggressive than the central bank’s and modestly more so than market.”

“We have long held the belief that the process to a tightening would be a three stage one. Given that the Bank’s current forecasts have no increase in rates until late 2019/early 2020, it would be difficult to justify a hike in rates any time soon without first acknowledging that the time for doing so was no longer so distant. As such, we think the first action of the central bank would be to go to a tightening bias, the second to formally bring forward any prospective tightening and then, finally, actually pull the trigger. Given that the Reserve Bank doesn’t seem to like shifting its stance at OCR reviews, this process would need to evolve over three consecutive Monetary Policy Statements. If we are right, this would mean, at the earliest, an August, 2017 move to a tightening bias, November bring forward the projected tightening and then February, 2018 raise rates.”

“We had thought the RBNZ would accede to the strength in the domestic economy and move to a tightening bias by August at the latest. However, the May Monetary Policy Statement revealed no intent whatsoever to do this with the Bank restating its view that it saw an equal chance of a rate cut as a rate hike. As hard to believe as this may be, it is the Bank’s stated view so can’t be ignored.”

“The stance was, implicitly, restated in the June OCR review and, perhaps, more importantly, developments since the May MPS are more likely to convince the RBNZ that it is doing the right thing than not.”

“Our view on where the rate hike cycle begins is not that different to the market’s with June 2018 currently priced in for the first move. June, of course, is unlikely as it’s an OCR review date not an MPS. The market then has a second rate hike by November 2018 with the potential for a couple more the following year.”

“We still think that, ultimately, the cash rate will need to push up to and through neutral and that when the process begins it will tend to be quicker than the market will price. We do not know exactly where neutral is these days but we do think it is substantially higher than where rates currently are. We have, for now, lopped the top off the peak in our OCR track to 3.0% from 3.75% to acknowledge the widening spread between the cash rate and lending rates but acknowledge that this spread has changed significantly in the past and can do so again.”