RBNZ preview: Fiscal spending argues for a hawkish 25bp hike

At the April meeting, the Reserve Bank of New Zealand hiked by 50bp, taking the official cash rate to 5.25%, and the latest rate projections suggest it should deliver one last 25bp hike this week. A 25bp hike is a consensus call and fully priced in, and most of the market reaction will however depend on forward looking language and the new rate projections. We had previously expected a drop in inflation to push the RBNZ towards confirming this was indeed the end of the hiking cycle, but the recent surprises in the New Zealand Treasury’s budget are generating fresh inflationary risks.

The government announced last week it will boost spending to support an economy hit by high cost of living and recently by severe weather events. The new estimates for the fiscal 2023 budget deficits are at NZD6.63bn, considerably above the NZD3.63bn December forecast. Most importantly for the RBNZ, the Treasury sharply revised growth forecasts on the back of extra spending, and no longer expects a recession this year (which is instead the RBNZ base case).

New Zealand experienced a net migration gain of 65,400 in the first quarter. Of the arrivals, 42,254 are on work visa, which far exceeds the RBNZ’s estimate of 6,600. One could argue that the large injection will help ease labour market pressures by increasing labour supply as New Zealand’s jobs market had remained very tight – despite overall labour market participation at its highest since 1987, first quarter unemployment remained unchanged from December at 3.4%. However, the Reserve Bank recently pointed at migration to be inflationary on balance, and the government’s focus on attracting skilled workers is probably behind this assessment.

Data wise, there have been no upside surprises for the latest headline inflation numbers. First quarter inflation fell well below the Reserve Bank’s February forecast, dropping from 7.2% to 6.7%. The housing story in New Zealand is not that different from few months ago – activities remain subdued as households face tight lending conditions and high cost of living pressures. CoreLogic’s latest data show annual housing consents down by 7.9%, and both sales number and prices are down by 30.5% and 10.3% respectively compared to April 2022.

The housing market, however, has held up better than the Reserve Bank had anticipated. Compared to the previous month, average national prices dropped by 0.6%, which is smaller than the average level of 0.9% seen during the current downturn. We don’t see the housing market stopping the RBNZ from its hawkish stance, especially with inflationary risks from fiscal stimulus on the upside.