New Zealand central bank preview: 25bp hike, with many more to come

Rising inflation, a tight labor market, and high house prices mean that the Reserve Bank of New Zealand will hike rates by another 25bp on Wednesday and may upgrade the rate projections to signal six more back-to-back rate increases in 2022. While not our base case, a 50bp move is not a remote possibility. Expect any FX impact to be overshadowed by geopolitics.

Domestic backdrop warrants more tightening

The Reserve Bank of New Zealand has not held a policy meeting since November 2021, which makes this February meeting quite crucial to gauge whether the domestic and external developments of the last three months have triggered a shift in the Bank’s policy stance.

Back in November, the rate path projections – which will be upgraded this Wednesday along with the other forecasts – embedded a 25bp rate hike in the first quarter. As this is fully priced in by the market, we expect the RBNZ to hike the Official Cash Rate (OCR) by 25bp on Wednesday, a move that is warranted by fourth-quarter inflation, unemployment, and house prices figures, which have all come in close to the November projections (table below). Only wage growth has truly exceeded the RBNZ's expectations, although a 1.4% quarter-on-quarter acceleration does not appear particularly alarming.

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Source: Stats NZ, RBNZ, ING

Given that a 25bp hike is fully in the price, markets will focus on the upgraded rate and economic projections. The November rate path projections implied five 25bp rate increases after the one in February (i.e. OCR at 2.25%) by year-end. We think the RBNZ may add another hike in the 2022 rate forecasts, therefore signaling 25bp hikes in each of the remaining six meetings this year.

NZD: RBNZ impact secondary to external factors

We think that an upgrade in the rate path projections by the RBNZ, to signal six hikes (after the February one) in 2022, can help consolidate the market’s expectations on the Bank’s tightening plans and offer some short-term support to the New Zealand dollar.

Still, a highly volatile risk environment due to the geopolitical tensions in Ukraine and unstable equity markets means that any post-RBNZ reaction may be quickly overshadowed by external drivers. Even if our expectations for a “hawkish hike” (25bp) by the RBNZ on Wednesday prove correct, the market’s reluctance to price out geopolitical risk could result in NZD/USD struggling to move above 0.6750 this week, with risks skewed towards a pullback towards 0.6650 in the coming days.