Hike rates

RBNZ says it will raise rates in small increments

The Reserve Bank (RBNZ) is signaling its intention to raise interest rates much more slowly than it eased monetary policy at the start of Covid-19.

RBNZ Deputy Governor Christian Hawkesby delivered that message in a speech finalized on September 15 and released today (Tuesday).

He contrasted the approach used by the RBNZ in the early stages of Covid-19 to the one it uses now, saying that when there is a “material threat” that the RBNZ will not meet its inflation and growth targets. employment, “the path of least regret is to act quickly and take significant steps to build confidence that the policy settings will be appropriate if the risks to the outlook materialize”.

Hawkesby called the opposite approach “tapuwae kōtuku”.

“It roughly translates to ‘reflective steps’ and is a phrase often used to describe how to walk as a visitor on a marae,” he said.

“The idea is to take small, thoughtful steps as you assess the environment around you. You’re walking in the right direction, but slowly in case your assessment changes quickly (are your hosts friends or foes?) .

“In the world of monetary policy setting, this translates into confidence in the outlook for the economy and a step in the right direction based on how the economy is likely to develop.

“This is consistent with the observation that when there is a typical degree of uncertainty and the risks are balanced, central banks generally tend to follow a smoothed path and keep their policy rate unchanged or move in increments 25 basis points.”

Hawkesby said the RBNZ’s approach could be compared to an adaptable white heron (kōtuku), rather than an aggressive “hawk” (kahu) or peaceful “dove” (kererū).

Markets change expectations

His comments come as some RBNZ watchers expected the central bank to raise the official exchange rate (OCR) by up to 50 basis points in its next review on Oct. 6.

Hawkesby, after Delta’s emergence in the community prevented the RBNZ from lifting the OCR as scheduled on Aug. 18, told Bloomberg that the RBNZ was actively considering a 50-point raise. The comment caught the attention of traders.

The prospect of a 50bp rise has become important again after the release of stellar June quarter GDP figures last week – the day after Hawkesby’s speech was finalized.

However, the release of the speech saw financial markets scale back their expectations of a sharp rise on Oct. 6.

ANZ Chief Economist Sharon Zollner and Senior Strategist David Croy said that while markets priced a 35-point rise on Friday, they now price a rise of less than 25 points.

Down the elevator; Upstairs

Zollner and Croy said Hawkesby’s comment was unsurprising and consistent with their thinking.

“In short: take the elevator down and go up the stairs. This has long been the way monetary policy has been conducted and it still is today,” they said.

“Inflation risks are on the upside, but growth risks are on the downside. A measured approach is the way to go.

“It’s important to note that the RBNZ is not on a path to political normalization because the economy is back to ‘normal’. It is normalizing because the risks of not doing so (boom risks -bust) are beginning to outweigh the risks associated with the pandemic.

“But the economy remains vulnerable (particularly housing), so normalization needs to be done in a thoughtful and gradual way.

“We continue to expect the RBNZ to increase OCR in steady steps (starting with 25 basis point hikes in October and November) to a peak of 1.5% by August of the year. ‘next year.”

See the full speech here.