NZD: another 50bp rate hike

We expect the RBNZ to hike rates another 50bp on Wednesday to take the OCR
to 3.50% and further into restrictive territory. NZ’s growth has remained robust
despite rapidly declining house prices, weak business & consumer confidence and
higher rates & living costs. A large part of the reason for this resilience is the
opening up of international borders and the return of tourists (before the pandemic,
tourism made up about 20% of NZ’s economic activity) as well as international
students, which also help provide the short-term labour the economy needs. We
expect this boost to growth to begin to wane by Q4, but in the interim the RBNZ
will stay on path to get the OCR to 3.75-4.00% by year end. With the market fully
priced for another 50bp hike by the RBNZ, the focus will be on the central bank’s
rhetoric, especially any comments on the currency and how it may be adding to
inflation. The NZ TWI is running substantially below the RBNZ’s forecasts from its
August MPS, but the central bank is unlikely to say it is prepared to alter its
forecasts and monetary policy in response to the exchange rate just yet and unless
the currency runs below its forecasts for longer. The RBNZ’s previous language on
the exchange rate has been that its raising of rates has kept it higher than would
otherwise be the case and that the lower exchange rate is feeding into inflation via
higher import prices, but is also supporting exporters’ revenues.

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