TD Securities has brought forward its expectation for Reserve Bank of New Zealand action, now pencilling in the first 25 bps increase in the Official Cash Rate for July rather than September, while still projecting four moves in total. The shift follows RBNZ guidance that the OCR is likely to rise at coming meetings, although the view also incorporates a weaker growth outlook and a more deeply negative output gap.
The projected path implies 4 x 25 bps hikes, with the RBNZ’s own OCR track consistent with an initial 25 bps lift in Jul. The bank’s estimate of the nominal neutral rate is 3.50%, which is treated as a ceiling for rate pricing; the strategy stance is to receive New Zealand rates on yield sell-offs.
RBNZ Hike Expected in July Amid Preemptive Policy Shift
We are pulling forward our forecast for the Reserve Bank of New Zealand’s first interest rate hike to July from September. The central bank has signaled it would rather act preemptively, even with a weak growth outlook. We still expect a total of four 25 basis point hikes in this cycle.
Recent data supports this shift, as Q1 inflation remained stubbornly high at 4.2%, well outside the RBNZ’s target band. While last quarter’s GDP growth was a sluggish 0.3%, a strong labor market with unemployment falling to 3.8% gives the bank confidence to begin tightening. The swaps market is now pricing in an 85% chance of a July hike, aligning with our new view.
Market Implications and Historical Context
For traders, this means the front end of the yield curve is likely to reprice higher. We anticipate a flattening of the curve as short-term rates rise faster than long-term ones. The spread between New Zealand’s 2-year and 10-year government bonds should narrow in the coming weeks.
The bank’s own estimate for the neutral cash rate is 3.50%, which we view as a ceiling for this hiking cycle. Therefore, we would see any significant yield sell-off as an opportunity to receive fixed rates on swaps. If the 5-year swap rate approaches 3.50%, it presents a favorable entry point to bet that rates will not go materially higher.
This pattern has historical precedent, recalling the 2014 cycle where the RBNZ hiked rates into a slowing economy before having to stop. That experience suggests the market can overestimate the duration and peak of a tightening cycle. This reinforces our belief that the OCR will struggle to stay above 3.50% for any extended period.
