Despite being the first of the world’s major central banks to raise interest rates when inflation flared bright in late 2021, some economists are warning that stubborn inflation pressures suggest the RBNZ still hasn’t increased the official cash rate far enough to tame prices.
The RBNZ was also a global leader in the central banking community in early 2022 when it adopted bigger 50 basis point increases in the official cash rate, said Sharon Zollner, chief economist at ANZ in New Zealand.
“That shift by the RBNZ in early 2022 turned out to be the canary in the coal mine for the Federal Reserve,” she added.
A similar scenario is building ahead of the RBNZ’s policy meeting on Wednesday, she said.
A further interest-rate increase by the RBNZ would take the official cash rate to 5.75 per cent from 5.50 per cent, and there was a high probability that it would tap the brakes further in April, highlighting that a two-sided policy debate was still in play for most central banks, she said.
It would signal to the world to “stop being so complacent”, Zollner added.
The RBNZ often operates independently and ahead of other central banks. In 2007, for example, interest rates in New Zealand were raised four times, while the Fed signalled it was on hold.
“The RBNZ is not afraid to go it alone,” Zollner said.
Prashant Newnaha, Asia-Pacific macro strategist at TD Securities, said the RBNZ also led the global central bank community in debating the merits of quantitative tightening and was one of the first to announce a pause.
“A hawkish RBNZ could reinforce the idea that the pace and magnitude of cuts from other central banks is likely to be slower going ahead,” Newnaha said. “The RBNZ is likely to deliver a hawkish message, one that should further shake the market’s myopic focus on rate cut normalisation.”
The growing potential for the RBNZ to extend its tightening cycle over coming months comes after the Reserve Bank of Australia signalled it can’t rule out further interest rate increases.
At the same time, recent inflation indicators in the US suggest that it will be some time yet before the Fed will move to cut interest rates.
Federal Reserve governor Chris Waller perhaps summed up the mood when he said in a speech last Thursday that there was “no rush” to reduce US interest rates in light of stronger-than-expected readings on inflation and economic growth.
The Wall Street Journal
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Bond traders would do well to focus on the Reserve Bank of New Zealand’s policy meeting next week, given that the small central bank could upset the international consensus that interest rate cycles have peaked globally and cuts aren’t far away.