PREVIEW: RBNZ rate decision - Lockdown lowers rate hike chances

OVERVIEW

The RBNZ is expected to hike the OCR by 25bps to 0.50% with OIS pricing in about an 85% probability for a hike in rates, although there was a recent shift in expectations with some of the largest domestic banks including ASB and Westpac dropping their calls for a hike after New Zealand announced its first community COVID-19 case since February and imposed a nationwide lockdown which is in-fitting with the government’s elimination strategy, while Capital Economics still anticipates higher rates but has moderated its hawkish view to just a 25bps increase from a prior call of a 50bps hike.

PREVIOUS HAWKISH CALLS

Prior to the announcement of the fresh COVID-19 case and level 4 lockdown that is set to last for three days across the entire country and seven days in Auckland, the likelihood of a 25bps hike was 100% priced in and another 25bps increase in November, followed by two additional hikes during H1 next year. Meanwhile, the four largest banks in New Zealand were more aggressive in their views for this year and had all forecast three 25bps increases by year-end, implying a hike at each of the August, October and November meetings.

LSAP END PAVED THE WAY FOR A HIKE

As a reminder, the RBNZ was hawkish at its last meeting in July whereby it announced it was to halt QE by ending its LSAP program which was seen as paving the way for a hike and it stated that the level of monetary stimulus can now be reduced to minimise the risk of not meeting objectives. Furthermore, the Committee noted that economic conditions since late last year have been persistently firmer than anticipated and agreed that a least regrets policy now implied the significant level of monetary support could be reduced sooner, which had spurred the previous widespread hawkish shift in expectations.

STRONG DATA SUPPORTS LIFT-OFF

Strong economic data further supports the case for a hike including firmer than expected CPI Y/Y in Q2 at 3.3% vs. Exp. 2.8% (Prev. 1.5%) which was the highest in a decade and surpassed the central bank’s 1%-3% medium-term target for the first time in 19 quarters, while jobs data also topped estimates with Jobs Growth in Q2 at 1.0% vs. Exp. 0.7% (Prev. 0.6%) and the Unemployment Rate fell to 4.0% from a revised 4.6% the prior quarter. In addition, a relatively contained domestic COVID-19 situation was another factor that contributed to the view that less policy support was needed although, with the recent COVID developments, Westpac has since suggested that “there is nothing to be gained from pushing the OCR higher now, rather than waiting for more clarity”.

RAMPANT HOUSE PRICES ALSO FAVOURS NORMALISATION

A rampant property sector in New Zealand is another factor likely to influence the central bank to begin normalisation soon given its requirement to consider its policy impact on housing and reports recently noted that the RBNZ is now considering tighter lending standards to reduce the risks associated with excessive mortgage borrowing, as house prices are above their sustainable level, with options said to include tighter LVR restrictions and/or debt-to-income ratios which they can now operationalise following the signing of a Memorandum of Understanding with the Government.

ANNOUNCEMENT

The announcement is scheduled for 03:00BST (14:00 local time) where focus will be on the actual rate decision in which, any surprise pause will likely pressure NZD, while the extent of support for the currency from a 25bps hike is not so clear cut given that a lift-off is expected and could depend on if the statement stokes or triggers an unwinding of the hawkish future rate bets.

The central bank will also be providing a livestream press conference which will begin an hour after the rate announcement.