RBNZ To Downshift To 25 Bps Increase In April As Tightening Nears An End- Reuters Poll

The Reserve Bank of New Zealand will scale back its tightening pace to a quarter-point rate hike on Wednesday as inflation runs hot even as the economy slows, according to a Reuters poll of economists who were split on where rates would peak.

New Zealand's economy is expected to have shrunk 0.3% this quarter, following a 0.6% contraction in the final three months of 2022, indicating a mild recession that is likely to prompt the RBNZ to slow its torrid pace of rate hikes.

With inflation still running close to a three-decade high of 7.2%, more than double the central bank's target range of 1%-3%, the RBNZ likely has more work to do before pausing its most aggressive campaign since introducing the cash rate in 1999.

Over 90% of economists, 22 of 24, in a March 27-30 Reuters poll said the RBNZ would hike the cash rate by 25 basis points to 5.00% at its April 5 meeting, the highest since December 2008. Only two expected a pause.

The latest move would follow a 50 basis point rise in February, for a total of 450 basis points over the past 18 months.

"The labour market is still very tight and inflation expectations still very high. While the economy is cooling, it is not doing so rapidly. So, the Reserve Bank can't yet be confident they have done enough," said Sharon Zollner, chief economist at ANZ.

Reuters Poll: New Zealand monetary policy and economy outlook,

The largest banks in the country, ANZ, ASB, Kiwibank, Bank of New Zealand and Westpac, all expected a 25 basis point hike on Wednesday, in line with market pricing.

Although the central bank forecast inflation would return to within the target range in the third quarter of next year, economists were split on where rates would peak.

A significant minority polled, 10 of 21, predicted another 25 basis point hike in May to reach 5.25%, a touch below the RBNZ's own terminal rate forecast of 5.50%. The remaining 10 expected rates to stay at 5.00% and one said 4.75%.

Eight of 10 respondents who answered an additional question said the bigger risk to their terminal rate forecast was it would be higher than they predicted, while the remaining two said it was that it would be lower.

"The RBNZ are hell-bent on breaking the back of the inflation beast, with their thoughts centered around a 5.50% terminal rate. That would be a step too far, and cause a deeper recession than they forecast," wrote Jarrod Kerr, chief economist at Kiwibank.

"We believe the RBNZ should hike to 5.00% and pause. Enough is enough, and the RBNZ has done more than enough. (But) the risk is clearly tilted to more hikes than we expect."

The poll showed inflation would remain above the RBNZ's 1%-3% target range until mid-2024. It was expected to average 5.1% this year and slip to 2.6% in 2024, matching January predictions.

New Zealand's economy was expected to grow 1.2% this year, a downgrade from 1.5% predicted previously. It was expected to grow 1.4% in 2024.

(For other stories from the Reuters global long-term economic outlook polls package:)