SYDNEY — The Reserve Bank of New Zealand is expected to come quickly to a decision to keep interest rates on hold at its policy meeting on Wednesday, but the central bank is nevertheless set to wrestle with the problems of sticky inflation at a time of increasing financial stress.
The consensus heading into the meeting is that the official cash rate will be held at 5.5%, but there could be dovish tweaks to the outlook.
“The RBNZ has likely passed the peak in the cash rate hiking cycle. However, now it is confronted by a complex policy trade-off balancing sticky domestic inflation, against clear signs of broadening financial stress,” said Nick Guesnon, economist at UBS.
If financial stress indicators continue to rise, and with the economy languishing in a long recession, the RBNZ could start to drop hints that interest rates might be cut earlier than expected, he added.
The RBNZ’s February data on non-performing loans ratios confirmed a concerning uptrend from last month for commercial property and agriculture, both highly indebted parts of the economy.
For commercial property, the NPL ratio rose to 1.2% in February, its highest level since 2015. While this was far below the 2011 cycle peak of 4.2%, the cycle upshot has been rapid, from a low of only 0.2% in July of last year.
“If the recent trajectory continues, commercial property NPLs could hit a new record high in around 18 months,” Guesnon added.
Agricultural NPLs also rose to 1.7% in February, the highest since 2021, the RBNZ data showed.
Meanwhile, housing NPL ratios held at 0.5% in February, the equal highest since 2013, but still well below the peak seen in the global financial crisis of 1.2%.
“We are less concerned about mortgage stress given home prices now seem to be on a gradual uptrend, and filled-jobs growth still remains positive,” Guesnon said.
The RBNZ could view rising arrears as more concerning than the problem of stalling economic growth because they are capable of quickly generating a negative feedback loop in the economy through the job market, which can be hard to reverse with interest rate cuts, Guesnon added.
UBS is sticking with its view that the RBNZ will wait until November before lowering interest rates, “but will monitor these trends and the RBNZ’s communication for potential shifts,” he said.
“The recent trends in arrears raise the risk of an earlier rate cut. We consider July, August and October in 2024 as live meetings, but we judge the August meeting as the most likely meeting if the RBNZ is to cut earlier than we currently expect,” he said.