RBNZ meet this week – flooding, cyclone events bolster the case for a pause

Last week KiwwiBank called for a pause at the Reserve Bank of New Zealand February 22 meeting in the wake of severe flooding and cyclone damage:

Analysts at the bank did separate out what they thought the Bank should do from what they expect it will do, concluding:

• That’s what we think the RBNZ should do. What we expect the RBNZ will do, however, is deliver a 25bp or 50bp hike. We believe a 75bp hike is well and truly off the table. RBNZ officials are concerned about the path of inflation. And they may want to keep their foot firmly on the brake. But we expect to see a more moderate path for interest rates. We expect a peak of 5%, down from 5.5%.

ANZ also:

• “As the scale of the devastation has been gradually revealed, the market has all but priced out the chance of the RBNZ going ahead with the 75bp hike it signalled last November”
• “Indeed, it’s now pricing a small chance of a pause or just a 25bp hike next week, which is fair”

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This is going to be a tough call for policymakers at the Reserve Bank of New Zealand. They have a job to do in the fight to bring down inflation in New Zealand. But overriding that they are citizens of a very small country and slamming their fellow citizens with a rate hike in the face of such a shock series of events would be harsh indeed. A pause, with strong hawkish language, and perhaps the near guarantee of an April hike could well be an attractive option.