Thursday, March 13, 2014

RBNZ begins the tightening process

The case for tightening became sufficiently compelling for the Reserve Bank of New Zealand (RBNZ) to raise interest rates today, lifting the Official Cash Rate (OCR) 0.25 percentage points to 2.75%.

As you know, we believe the case for tightening has been compelling for a while.  That’s for all the reasons the RBNZ outlined today: New Zealand’s economic expansion has considerable momentum, growth in demand has been absorbing spare capacity and inflationary pressures are becoming apparent, especially in the non-tradeables sector.

There was unanimity of view in the market that the Bank would move today.  That meant the main point of interest was the forward track for interest rates.  In extending the forecast rate track out to March 2017 the RBNZ has signalled a rise in interest rates (90-day bills) to 5.3% at the end of the period which implies an OCR of around 5.0% or a tad more.  That’s consistent with our view of a peak in the OCR cycle of around 5.0-5.5% as outlined in our recent paper “The New Zealand Tightening Cycle” which you can read here

The RBNZ is often criticised for stomping on growth as soon as it gets going.  The most important factor for the RBNZ is not the absolute rate of growth but rather how the economy is growing relative to its potential to grow.  What the RBNZ has done today is start a process whereby some heat gets taken out of the cycle which will ultimately help extend the longevity of the expansion.