Reserve Bank of New Zealand Preview: Sticking to its 50 bps rate hike pattern

• The Reserve Bank of New Zealand is seen raising OCR by 50 bps to 3.5% in October.
• The focus will be on RBNZ’s policy guidance after the dramatic NZD fall has fed into inflation.
• A surprise 75 bps rate hike now seems off the table after the RBA hiked by only 25 bps.

The Reserve Bank of New Zealand (RBNZ) is set to extend its rate hike trajectory into the fifth straight meeting on Wednesday. New Zealand’s inflation at a three-decade high combined with the dramatic fall in the kiwi dollar makes a compelling case for more central bank tightening.

Is a 75 bps hike on the table?

The RBNZ is widely expected to increase the Official Cash Rate (OCR) by another 50 bps from 3.0% to 3.5% when the board members meet on October 5. Such a hike would mean the central bank hiked policy rates by 50 bps for the fifth meeting in a row. This policy announcement will not be followed by a press conference with Governor Adrian Orr.

Economists predict the central bank will deliver a half percentage point rate hike at this meeting as well as the meeting in November. A majority of them expect the OCR to reach 4.00% or above by the end of 2022, 50 basis points higher than August’s Reuters poll.

At its August policy announcements, the central bank said that they “did not consider 75 bps rate hike today,” while explaining that “50 bps moves have been orderly and sufficient.” The RBNZ raised its forecast of the terminal rate to 4.1%, implying another 100-125bps of rate hikes in the offing by mid-2023.

Heading into the rate hike decision, however, New Zealand’s inflation rate stands at a fresh three-decade high of 7.3% while the economy averts a recession in the second quarter, as eased Covid measures help spur 1.7% GDP growth. Meanwhile, the recent dramatic fall in the New Zealand dollar is likely to keep inflation elevated as a cheaper currency makes import prices higher.

These factors build a case for a 75 bps rate hike by the kiwi central bank. Will the central bank favor a super-sized rate hike? Probably not, especially after the Reserve Bank of Australia (RBA) slowed its tightening pace by delivering a smaller-than-expected 25 bps rate hike on Tuesday. The Australian central bank noted that more tightening is needed ahead while justifying that the “cash rate has been increased substantially in a short period of time.”

Governor Adrian Orr, during his recent appearance, remarked that the tightening cycle is “very mature” but he did also stress that there is still some work to do. His comments failed to ramp up expectations for a 75 bps rate hike in October. Another factor that could ward off Orr and company from delivering a bigger rate hike is looming downside risks to the country’s property market. Aggressive rate hikes could deepen the post-pandemic slump in the property sector. Additionally, the economic slowdown in China and growing recession fears worldwide could also temper the bank from going for any aggressive rate hike.

Trading NZD/USD with RBNZ decision

NZD/USD could see a fresh downswing towards its 2022 lows at 0.5565 on a ‘sell the fact’ effect should the RBNZ go for the expected 50 bps rate lift-off.

In case the central bank surprises with a 75 bps rate hike and/or comes out more hawkish concerning its policy guidance, the kiwi pair recovery could gather strength and target the 0.5900 area.

The persisting risk trend, however, will have a significant influence on the pair's reaction to the RBNZ decision.