Q3 NZ Inflation makes NZ rates fair

The Q3 2021 CPI print was much higher than the RBNZ expected, printing at 4.9%yoy v. RBNZ 4.1%yoy. The details showed plenty of inflation from the housing market, which presumably will slow over time as rate hikes and various macro-prudential measures bite. There was also a strong contribution from transport, which mostly reflects the increase in energy prices that we’ve seen to date.

While this seals the case for another 25bps hike on 24 November, I don’t see the RBNZ hiking 50bps. It does, however, make a sustained hiking campaign more likely. Expect 25bps per meeting until things are more under control.

The RBNZ’s preferred measure of core inflation, the Sectoral Factor Model (SFM) was 2.7%yoy, the highest print since 2009. Alternative measures of core inflation, such as the trimmed mean (4.3%yoy) and weighted median (3.0%yoy) were also high. So inflation is both high and higher than the RBNZ expected.

Given that energy prices won’t rise forever, and that the RBNZ has already acted to slow housing markets, I am not too excited about this information. I think the better signal on inflation is coming from the quarterly weighted median measure. Weighted median CPI slowed 10bps to be 0.8%qoq in Q3, and is currently running at around 3%yoy (over the past four quarters). This is fast, but it’s not an emergency.

The NZ rates market sold off hard with 1yr and 2yr yields rising by 25bps to 30bps, to be at their highest levels since early 2019. The probability of a 50bps hike by the RBNZ is now about 50%, with OIS for the meeting closing around 87.5bps.

I don’t see a 50bps hike in November myself. I think it’s at best a 25% chance. With Auckland’s lockdown being extended today, despite high vaccination rates, the case for a 50bps hike on 24 November is going to be pretty hard to make.

Given that term OIS is now around my post MPS projections, and that the short end is pricing a 50bps hike I don’t believe in, I revise my bearish post-MPS judgement that Kiwi rates were too low. They now seem fairly priced to me.

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