New Zealand’s central bank to hike interest rate by half a percentage point

The central bank of New Zealand will increase its policy interest rate by half a percentage point to counter rising inflation when it meets on May 25, a move of that magnitude for the first time at successive meetings, according to a Reuters poll.

The 50 basis point hike last month was the biggest increase in official cash rate OCR for two decades, but the Reserve Bank of New Zealand RBNZ said more hikes were needed to bring inflation under control after it hit a three decade high last quarter.

All but one of 21 economists in the May 13 -- 19 Reuters poll said the RBNZ would hike the OCR by 50 basis points to 2.00% at the meeting next Wednesday. One economist predicted a 25 basis point hike.

It would be the first time since the OCR's introduction in March 1999 that RBNZ has raised the rate by half a percentage point at two consecutive policy meetings.

With inflation and supply chain disruptions not expected to be easing anytime soon, the RBNZ is likely to stay hawkish while trying to avoid tipping the economy into recession.

Sharon Zollner, chief economist at ANZ, said there was little doubt that the RBNZ will deliver another 50 basis point hike next week unless something dramatic comes out of left field.

The path is murkier beyond that. Evidence mounts that demand is cooling and that is why we expect the RBNZ to switch to the more usual 25 basis point hike from July onwards. Economists have predicted that the OCR will reach 2.50% or higher by the end of September, rather than the end of the year as predicted in the previous survey, which brought forward rate hike expectations for the fifth consecutive Reuters poll and a majority of 18 of 21, now expect the OCR to reach 2.50% or higher by the end of September.

The latest survey predicted that the rate would reach 3.00% by the end of the year, which would still leave it below where it was in 2014 after the RBNZ delivered four consecutive quarter-point rate hikes.

Jarrod Kerr, chief economist at Kiwibank, said that the cash rate would hit 3% by year-end inflation expectations and run well above the target 2%.

Any further push higher in expectations will only fuel the RBNZ's resolve to tighten aggressively. New Zealand's central bank has been slow in rolling back the policy as policymakers try to control an inflated housing market and soaring price pressures. A decline in property prices could negatively affect household wealth and lead to slower consumer spending, leading to slower economic growth and rising unemployment.

11 of 18 respondents expect the cash rate to stay steady at 3.00% by the end of next year, or be lower by the end of the year. The remaining seven predicted it to climb to 3.25% or higher by then.

The strategy of the RBNZ is to get the foot off the accelerator quickly and then tread more cautiously on the brake. There's an inflation war going on, but COVID doesn't care about monetary policy settings, according to ANZ's Zollner.

If the balance of developments suggests more upside risk to inflation, another 50 basis points hike in July would absolutely be game on.