Daily Commentary BY THE CURVE TEAM –

RBNZ Eyes Rate Hikes

27th of May, 2021

The Reserve Bank of New Zealand (RBNZ) met yesterday and outlined their expectations for future interest rate rises.

Unlike the RBA, the RBNZ publishes forecasts of interest rates. It showed that the end of 2022 is when the RBNZ expect to increase interest rates.

They also expect mid 2024 to be when rates return to pre covid levels. New Zealand is not a perfect comparison for Australia.

New Zealand’s labour market, inflation and house prices are all running hotter than Australia’s. Nonetheless, it adds to the narrative of developed economies potentially tightening monetary policy sooner than initially expected.

This reduces the pressure on the RBA to keep its policy loose, primarily from the Australian Dollar having less upward pressure.

The recent covid outbreak in Victoria though throws a spanner for the RBA. 25 cases have so far have been found in Melbourne, which threatens to send the economy back into lockdown.

Last year when Victoria was in lockdown the economy struggled. It was only when Victoria emerged from its lockdown that economic indicators for Australia showed a rapid recovery.

Yesterday another positive indicator was released, with construction work done up 2.4% for the first quarter following a 1.5% fall in Q4. The Homebuilder scheme and government spending propelled the Q1 numbers, but it still remains 1.1% lower than Q1 last year.

Should Victoria go into an extended lockdown, it will threaten Australia’s economic recovery and could also change the trajectory of monetary policy, especially considering there is no JobKeeper to support businesses anymore. Most imminently, yield curve control and QE will more likely be extended.

Josh Stewart

Associate - Money Markets