RBNZ February Monetary Policy Statement Preview: (Overinflation) Nightmare on Bond Street

  • Inflation pressures have just kept on lifting ahead of RBNZ expectations
  • Expect the RBNZ to lift the OCR by 25bp, even though you could argue the RBNZ is behind the curve
  • Watch for any announcements about how the RBNZ will reduce its bond holdings over time
Interest rate increases look set to come steadily over 2022, even as NZ braces for the impending wave of Omicron to sweep over.  The reality is that inflation pressures have intensified in the three months since the RBNZ raised the OCR to 0.75%.  At that point the RBNZ was already forecasting the Official Cash Rate would exceed 2.5%.  With the release of this Wednesday’s Monetary Policy Statement, the RBNZ is likely to forecast an OCR peak of around 3%, give or take, which would be roughly in line with interest rate market pricing.  

We ourselves are forecasting a peak of 2.75%.  It’s a clichéd uncertain world, and the OCR could easily end up higher or lower.  The lift in inflation is more than the usual demand-driven pick up, as the supply side is struggling to keep up.  It’s always possible the RBNZ ends up leaning even harder on demand.  Conversely, we are very mindful that interest rates are lifting from a very low base, and household behaviours could be very sensitive to the increases.
With this meeting, as has been the case with the past two, there is some speculation that the RBNZ will want to catch up a little by lifting the OCR by 50bp.  As we argued ahead of November’s 25bp lift, when data were also stronger than expected in the lead-up to the decision, the market is already doing a lot of the RBNZ’s work.  Delivering ‘just’ a 25bp OCR increase while signalling an even higher OCR end point would continue this.  And, when people are again battening down the hatches in response to this latest COVID outbreak, business and consumer sentiment could do without another unwelcome surprise.

Financial markets will be interested in any details of how the RBNZ plans to reduce its substantial bond holdings.  Whatever the exact details, the RBNZ will want to ensure that it reduces its holdings in an orderly fashion that doesn’t destabilise markets.  Bond markets are all too good at having nightmares over central bank plans for winding back quantitative easing.


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