First impressions of the RBNZ’s October 2021 Monetary Policy Review.
RBNZ Monetary Policy Review, October 2021
- The Reserve Bank increased the OCR by 25 basis points to 0.50%, as was widely expected.
- It also signalled that it would continue to remove monetary stimulus over time.
- The statement acknowledged that the current Covid restrictions have suppressed activity and are placing a strain on some businesses.
- However, it concluded that these restrictions have not materially changed the medium-term outlook for inflation and employment since the August review.
- Inflation is expected to spike above 4% in the near term before settling at around the 2% target midpoint in the medium term – this forecast is unchanged from August.
- Rising costs and capacity constraints are a significant driver of inflation in the short term. But in an environment of strong demand, there is a risk that this could translate into broader, more persistent price pressures.
Implications
The RBNZ statement was very much in line with what we expected, and with our own thinking. There is substantial evidence that demand in the New Zealand economy was running hot before the latest Covid lockdown. And the evidence so far suggests that, as in previous lockdowns, activity is capable of bouncing back quickly as restrictions are eased.
Our view remains that we will see further rate hikes at the reviews in November, February and May, taking the cash rate to 1.25%. Beyond that, we expect the pace of further hikes to be gradual, as the RBNZ starts to converge on what it would consider to be a ‘neutral’ level of the cash rate.
Financial markets were largely priced for a 25 basis point hike today. As such, there was little change in interest rates or the New Zealand dollar.
