Traders put money on later rate rise
Reserve Bank governor Graeme Wheeler has prompted financial market traders to push back their bets for an interest rate hike by about three months with last week’s dovish monetary policy statement but there is scepticism among economists about the bank’s benign inflation track.
Ahead of the MPS last Thursday the market had almost fully priced in a 25 basis point increase in the official cash rate to 2 per cent by the March 22, 2018 OCR review and a second rise was fully priced in by the August 9 review next year.
Now the money is on a first quarter-point hike by June 28 next year and almost another hike priced in for November 8, 2018.
That’s despite the Reserve Bank signalling it does not expect to make a full quarter-point hike in the OCR until March 2020. In keeping its projections little changed this month, the central bank downplayed the rebound in first-quarter inflation, saying the short-term impact of higher petrol and food prices, which helped push annual inflation to 2.2 per cent, was likely to be temporary.
The bank lifted its track for annual inflation through 2017, but it still has the rate fading by year end and sinking back to 1.1 per cent in the first quarter of 2018.
“Over time the market has gradually pushed out when it [ a rate hike] will come through. “Market pricing is people putting their money where their mouth is,” said Nick Tuffley, chief economist at ASB Bank. “Most economists are expecting a rate hike sometime in 2018 but more in the back end of 2018. Notwithstanding the Reserve Bank hasn’t changed its stance in this statement.” ASB was among banks that immediately cast doubt on the RBNZ’s inflation track after the MPS last Thursday, saying it was projecting inflation pressures “will firm earlier than the RBNZ expects, and that inflation’s temporary dip in 2018 won’t be as far as the RBNZ currently forecasts.”
Stephen Toplis, head of research at Bank of New Zealand, said he was “perplexed” that policy was left in neutral without “even the slightest nod to a tightening bias”.
“We have witnessed rising inflation, rising inflation expectations, falling unemployment, a weakening currency and a strengthening global economy,” he wrote in his initial reaction to the MPS statement last week.
“We had thought this would rattle the Reserve Bank,” he wrote.
“As it turns out, it all seemed to have counted for little.”
New Zealand interest rates have adjusted in the wake of the MPS, although part of the move can be attributed to moves in US Treasuries.
“The market had got quite hyped up on the likelihood of inflation but the RBNZ didn’t see that,” said Martin Rudings, a senior dealer at OMF.
“Now there’s a lot of repositioning going on. The interest rate market in New Zealand continues to unwind positions on interest rate hikes.”
The consumers price index rose 1 per cent in the first quarter, figures last month showed.
Business prices rose more modestly, based on the producers price index released yesterday, which showed producer input prices rose 0.8 per cent in the first quarter, although on an annual basis they were up 4.2 per cent, almost twice the gain in annual CPI.