If the Reserve Bank of New Zealand (RBNZ) hoped its hawkish November monetary policy review would convince financial markets interest rates won't be cut until some time in 2025, it has failed.
Market pricing of the Official Cash Rate (OCR), which was already well below the RBNZ’s projections, has fallen further since the release of the Monetary Policy Statement (MPS) on Wednesday.
Analysis by ANZ Research, released Friday morning, showed traders were positioned for 72 basis points of rate cuts in 2024, up from 62 points prior to the release of the MPS.
There was a roughly 100 basis point gap between the OCR level the market's expecting in mid-2025, and what the central bank itself estimated just two days earlier.
The RBNZ lifted its OCR forecast to peak at 5.69% in the September quarter of 2024 and not be cut until half way through the following year.
Migration-led population growth is increasing demand for housing and adding to inflation pressures, the RBNZ said, meaning another rate hike could be needed to get inflation expectations back on target.
While there was an immediate reaction to the hawkish statement, with swap rates rising 12 basis points and the NZ dollar climbing half a cent, it didn’t last.
Texas hold’em
Jason Wong, a market strategist at BNZ, said the market was highly skeptical that monetary policy would need to stay restrictive for so long.
“The two-year swap rate ended the day up only six basis points to 5.23%, or up 10 basis points from the pre-MPS level, after global forces supported lower rates earlier in the session,” he wrote on Thursday.
David Croy, a senior strategist at ANZ, said bond traders were not convinced the RBNZ would make good on its threat and hike interest rates while the rest of the world was cutting.
Market participants would need a catalyst to reprice rates in line with the central bank’s projection. The OCR track itself is not enough to win them over.
“Markets think the RBNZ is bluffing and remain captivated by lower global rates, but even if the RBNZ makes good on its threat, that won’t happen till 2024, and in the meantime, markets are likely to continue dancing to a global beat,” he wrote.
Bond traders will watch economic data with the RBNZ’s upward bias in mind, but won’t reprice rates unless those updates demonstrate the need for tighter monetary policy.
Croy said local rates being roughly unchanged was a partial success for the central bank, since global rates are falling and NZ’s longer term rates tend to track with US bond yields.
Deadly serious
Jarrod Kerr, the chief economist at Kiwibank, said there was “a bit of disbelief” among traders right now, but market pricing might creep higher as they digest the new OCR track.
The RBNZ was running out of patience with inflation and its suggestion it might raise rates should be taken seriously. But repricing interest rates across the market to align with the RBNZ’s track would be a “huge” movement that wasn’t likely to happen overnight, Kerr said.
“It's only been 48 hours, we might see that hike get priced in over the next month or so”.
Christina Leung, the principal economist at NZIER, said she thought the RBNZ would hold the OCR at 5.50% until the middle of 2025. Its decision to raise the forecast track was a way for the bank to signal it was worried about near term inflation pressure and to stop retail rates from falling too soon.
“We don’t think they will have to act on it, and it is more about managing market expectations of when rate cuts will begin,” Leung said.
Leung said one and two-year inflation expectations were easing, although the gradual increase in 10-year expectations could be of some concern.
“It is definitely one to watch, as the Reserve Bank will not want inflation expectations to become unanchored”.
26 Comments
“Reuters reported on Wednesday the government is considering spending more than 17 trillion yen for the package, which will include temporary cuts to income and residential taxes as well as subsidies to curb gasoline and utility bills”
japan is spending $110 billion on fighting inflation, which is at the absurd (to us) level of 2.2%
Those measures are not to fight inflation, they are to protect peoples standard of living, a better outcome than trying to create unemployment and mortgage defaults. Japan understands that you cannot control external supply side inflation by using demand side controls.
Methinks the MPC would benefit from getting out more and seeing the affects they have first hand.
Edited: Have I mentioned that after Christmas - which will be shocking - and about March we'll see the RBNZ having to get real? If not a cut in March, then soon after. The longer they leave it, the harder it will be to start cuts (and they may need to be substantial), and the more inflationary the cuts will be.
Not sure I agree with Jarrod's assessment. i.e. it'll take some time for bond traders to get the message.
In the US they say "don't fight the Fed". Makes sense too as the FED has massive firepower. Not so the RBNZ. In NZ's case it'd be "don't fight international bond traders".
I made a killing when then Chancellor Norman Lamont tried to fight the markets. He got slaughtered and cost UK Inc billions. We hear a lot from bank economists but the real economics muscle isn't found publishing "infomercials" for retail banks. Mr Orr isn't Lamont. At least I hope he's not.
What you are saying is true. But you should not discount the personal factor - Orr has got no credibility left, after the mismanagement and the un-necessarily ultra-loose monetary policy of the last few years.
The very fact that long term inflation expectations are not declining significantly is a very serious indictment of Orr's lack of credibility with the markets.
It is really time for him to go, and to get somebody in his place who is capable and serious about tackling inflation.
If this does not happen, inflation will never be defeated and the RBNZ will be forced to keep rates higher for many years to come.
ChrisOfNoFame,
I remember it well. Black Wednesday Sept. '92. Lamont tried to keep the UK in the Exchange Rate Mechanism(ERM) by raising rates from 10% to 15%, but within hours had to back down. The stockmarket soared and our firm did well. I was in St Andrews on business followed by golf with clients. Much drink was taken. No doubt George Soros had a glass or two.
Bond traders have no power over a sovereign currency issuing government. The government can always choose what bonds to issue if any and at what interest rate as it has nothing to do with financing its spending. Interest can simply be paid on currency reserves instead.
If global rates continue to track lower that's going to spike the NZD if the RB continues to run its mouth about HFL. The dairy industry will suffer even further and tradables inflation will fall anyway, pushing headline inflation lower. I can't see where this prediction of an uptick in inflation is coming from.
Yawn. RBNZ know that they will be cutting rates before US etc because they have killed the economy, so they are (a) buying foreign currency so that they defend the NZD and (b) preparing to use mortgage restrictions (e.g. DTI, LTV etc) to stop the housing market going crazy when they drop rates. Obviously they are staying quiet so that only the knowledgeble traders make a killing (off the back of the plebs who are still fixing to 2 and 3 year morgage rates).
The won't be "dumping the NZD". They'll be buying them using the foreign reserves they've been buying.
Once some semblance of normality has returned, they'll sell the NZDs to restock their foreign reserves ... Hopefully at a tidy profit.
In a way, it's a warning to FX markets.
"Powell points to how the Fed’s past tightening moves will continue to have an impact on the economy -- the full impact hasn’t been felt yet. If anybody thought the Fed wasn’t finished raising rates, his prepared remarks today sure put a fork in it. They are done."
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