Kiwibank says RBNZ should pause OCR hikes

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Kiwibank is calling on the Reserve Bank to put on hold any official cash rate increases as the country deals with the aftermath of Cyclone Gabrielle.

Thursday, February 16th 2023, 3:51PM 1 Comment

Economists recently revised their forecasts down for next week's OCR announcement from 75 basis points to 50 basis points.

Kiwibank economists believe any increases can be postponed until April.

"Wholesale interest rates would decline, and lending rates would soften. Temporary relief, of all kinds, is needed in the time of crisis," they say.

"The forward guidance from the RBNZ could point to a resumption of rate hikes from April, if required. Although the path for interest rates is likely to be much lower than the aggressive path to 5.5% outlined last November. It’s out of date."

"A pause from the RBNZ next week would be welcomed by most Kiwi, and highlight that officials are cognisant of the economic damage being inflicted. The Government has called a national state of emergency. There is significant damage to key infrastructure, buildings and housing. And there will be severe damage to crops and farms. Many businesses and households have also lost income with an inability to trade during the flooding.

"Guesstimates of the total economic impact are now in the billions, not millions."

"The next phase will be the clean-up and rebuild. We will see a sharp lift in economic activity as the nation rebuilds. Unfortunately, the construction industry is already operating at full capacity, with a shortage of labour."

They says the rebuild will take months if not years and it will be inflationary, but it is urging the central bank to look through the inflationary impact of the floods.

Kiwibank is clear in what it thinks the RBNZ should do.

"What we expect is that the RBNZ will deliver a 25 or 50 basis point hike.

"We believe a 75 basis point hike is well and truly off the table."

Kiwibank says there were some encouraging news in this week's inflation expectations survey.

"Inflation is peaking at lower levels. And global inflation pressures are abating." 

"The improved outlook justifies a lower interest rate trajectory."

BNZ head of research Stephen Toplis says it is difficult to know which way the RBNZ should respond.

"The near-term negative hit to activity and household earnings, and the balance sheet damage generated, would argue for a softer stance for monetary policy. But, the flip side is that the demand for labour will rise, New Zealand’s potential growth rate has just fallen (although on a national basis not much) and supply issues will add to inflationary pressure. This would all argue for tighter monetary policy.

Immediately, we think the disaster provides greater support for a more modest 50 basis point rise in the cash rate at next week’s Monetary Policy Statement. It will quite possibly, however, ultimately extend the peak in the cash rate. But all this will be at the margin. The bigger picture New Zealand and global economic evolution will remain the predominant driver of future rate moves."

Tags: OCR forecasts

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