Another 0.5% Increase

The Reserve Bank of New Zealand raised interest rates by half a percentage point today – the fourth consecutive move of this size and seventh straight hike. The Official Cash Rate (OCR) now stands at 3%, which was last seen in July 2015. ^[1]

Officials repeated that it "remains appropriate to continue to tighten monetary conditions" at the necessary pace for maintaining price stability and maximum sustainable economy and stressed its commitment to this remit.

More Tightening Ahead

Today's 50 basis points increase was in line with expectations, but probably what came as a bit of a surprise, is the sustained hawkishness. This is the RBNZ's most aggressive rate-hiking cycle since the OCR was introduced in 1999, but officials hinted at more tightening and also raised their projections.

They now see the Official Cash Rate (OCR) at 3.7% by the end of the current, a noteworthy upgrade form the 3.4% forecast back in May. They now expect rates to peak at 4.1% next year and remain at this level well in 2023. ^[2]

The RBNZ started its tightening cycle almost a year ago, far ahead than its major counterparts, having delivered an eye-watering 275 basis points worth of hikes. Despite that, it pointed to more moves ahead, while refraining from introducing softer elements into its rhetoric - a pattern we saw from other central banks recently and has made central bank communication a messy affair.

Earlier in August, the Reserve Bank of Australia and the Bank of England both signaled more hikes ahead, but stressed that that monetary policy "is not on a pre-set path" ^[3], ^[4]. Fed-Chair Powell last month, hinted towards a potentially less aggressive path, saying that "at some point it will be appropriate to slowdown and we haven't made a decision when that point is". ^[5]

Surging Inflation

Surging inflation is the main driver behind the action of the RBNZ (and the other central banks), which accelerated to 7.3% and the highest level in thirty-two years. Based on today's projections, officials believe that this constitutes the peak, expecting CPI to ease to 6.4% in the next quarter and return to the 1%-3% target in 2024.

However they are worried about the core measures, noting that "Core consumer price inflation remains too high". They are also concerned about elevated wages, saying that "Wage growth has continued to pick up in line with tightness in the labour market,".

Annual wage inflation rose to 3.4 in the year ended June 2022, up from 3% in the year ended in March, to the highest level since 2008 ^[6], while median weekly earnings registered its biggest annual increase (8.8%) since the series began is 1998. ^[7]

Headwinds Ahead?

The resilient economy and strong labor market have allowed policy makers to pursuit this aggressive and front-loaded tightening path, in order to bring down inflation. However, the first advetrse signs of these actions have started to show.

Unemployment remains very strong, as it came in at 3.3% in the second quarter, but was lower than the record 3.2% of Q1. More to it, the RBNZ expects unemployment to rise faster than previously thought, now projecting it well above 4% next year.

The economy had expanded by a healthy 5.1% in Q2 year-over-year, but on a quarterly basis it contracted by 0.2%. The central bank does not see a recession, but it does projects slower growth ahead.

NZD/USD Reaction

The pair's kneejerk reaction was higher given the RBNZ's hawkishness and upgraded OCR projections, but renewed pressures on oil prices and souring sentiment during the European hours drag commodity currencies to negative territory.