RBNZ Preview: Forecast from eight major banks, slight chance of a hike, focus on projections

We expect the RBNZ to hike the OCR to 5.75% and to publish an OCR track that gives a decent hat-tip to the possibility of a follow-up hike in April (with a peak of perhaps 5.85%). We don’t expect the RBNZ’s medium-term forecasts for either activity or inflation to have changed significantly, with the higher OCR track bringing about the prolonged period of subdued growth that is necessary to bring inflation down. Hiking the OCR into a weaker economy is of course risky, but we expect the RBNZ to conclude that not hiking is the riskier option. If the Committee does in fact decide they need more evidence that a higher OCR is required before acting, we would nonetheless expect an extremely hawkish tone and an OCR track that sets a low bar fora hike in April.

It's a close call, but we expect the RBNZ to hike by 25 bps taking the OCR to 5.75% with the Bank's household inflation expectations survey the key catalyst for a change in view. A big jump in 5-yearr inflation expectations will certainly raise eyebrows at the RBNZ and cast credibility on the Bank if they don't take action. We expect the Bank to signal a subsequent hike, pinning the terminal rate at 6% for this hiking cycle.

We expect the RBNZ will leave the OCR unchanged at 5.50% at its February policy meeting. An increase in the OCR is a genuine possibility, but we suspect the RBNZ’s goal will be to drive home the message that the OCR is not moving lower in 2024. The RBNZ’s short-term forward profile for the OCR is likely to be little changed, keeping open the option to tighten – perhaps as early as the May Monetary Policy Statement – should the data warrant it. Future data on non-tradables inflation, the labour market, the housing market, and the Budget will be key in making the case for any further tightening.

We expect the RBNZ to maintain the OCR at 5.50%. We think the RBNZ will maintain its restrictive policy stance amid inertial price pressures. The tail risk is for further rate hikes in February and potentially beyond, as net immigration continues to support economic activity through greater spending on housing services. Barring a re-acceleration in inflation, we ascribe a very low probability (15%) to that risk, so long as progress is made on guiding inflation back towards target.

We expect the RBNZ to maintain its official cash rate at 5.50%. On balance, the RBNZ’s next move will likely be a rate cut than a hike.

Our house view is for no rate hike this week, but household inflation expectations figures released late last week are enough to make us nervous. That data showed two-year expectations rising from 3% to 3.2%, while five-year expectations rose to 3% after having been anchored at the midpoint of the RBNZ’s target range (2%) for four consecutive quarters. That’s a problem, because Keynesian central banker types believe that when it comes to inflation, expectations become reality.

The RBNZ will maintain the OCR at 5.50%. The RBNZ is likely to continue its hawkish stance, underscoring a commitment to sustaining high interest rates for an extended period.

We are skeptical whether the RBNZ can deliver another hike and expect the Bank to maintain the OCR at 5.50%. However, the RBNZ does not want to be the first central bank to cut rates, or indeed signal rate cuts. Thus, it will likely keep the option of another hike in its OCR track. This would imply a hawkish bias. While the risks are tilted towards the hawkish outcomes, a dovish risk for the RBNZ is if it opts to remove the hike embedded in its OCR track.