RBNZ seen raising rates by historic 75 bps

Whilst there has been some less expectations that inflation around parts of the world have topped out, recent data for New Zealand is remining us that inflation can remain at elevated levels for longer than anyone would like.

CPI rose 2.2% q/q, up from 1.7% and well above the 1.6% consensus. Annual CPI rose 7.2% y/y – slightly below the 7.3% peak – but if the quarterly is trending higher then it can send the annual higher too. Labor costs have risen to a record high of 3.8% y/y and, whilst the quarterly read pulled back from its record, at 1.1% q/q labor costs remain quite elevated from its long-term average of 0.01%.

Despite the inflation figures, the consensus was still for the RBNZ to hike by 50bp tomorrow – until inflation expectations threw a spanner in the work. Central banks pay close attention to inflation expectations, as fear of higher prices can result in higher places as fear of missing out demand drives prices.

We suspect a 75bp hike is more likely, given the central bank does not meet again until February and rising inflation and inflation expectations are not showing signs of topping out.

The understanding is for the RBNZ to hike by 75bp from 3.5% to 4.25%, with around one third of economists polled by Reuters opting for a 50bp hike.

The one-month OIS suggests an 87.6% chance of a 75bp hike, which means a 50bp has been more than priced in and we may get more of a market reaction if the RBNZ only go for 50.For what it’s worth, the RBNZ shadow board has favored a 75bp hike.