Mark Lister, 30 September 2022

The Reserve Bank will announce its latest monetary policy decision this coming week, almost a year to the day since the first increase in the Official Cash Rate (OCR) for this cycle.

We’ve seen four consecutive 0.50 per cent rate hikes since April, and I suspect we’ll get number five on Wednesday afternoon.

That’ll put the Official Cash Rate at 3.50 per cent, which is where it got to in 2014 at the peak of the post-GFC tightening cycle. Before then, it was last as high as that in 2009.

There’s an awful lot for Governor Adrian Orr and his colleagues to consider, not to mention comment on.

Central bank interest rates elsewhere have continued to rise sharply, with the Federal Reserve in the US having leapfrogged us, despite starting five months later in March.

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That aggressive tightening bias, along with the controversial UK mini-budget and a healthy dose of risk aversion, has been wreaking havoc in currency and interest rate markets.

The yield on a two-year US Treasury bond rose to a 15-year high during the week after rising for 13 successive days, the longest streak since data began in 1976.

In the UK, the yield on a five-year government bond rocketed up by half a per cent last Friday, the biggest daily increase since 1985.

This has seen the US dollar rise to a 20-year high, the Bank of Japan intervene in the currency market for the first time since 1988, and the British pound fall to an all-time low against the greenback.

Our currency has declined to US$0.56, lower than the COVID-19 recession of 2020 and the weakest since 2009.

This is more about US dollar strength than New Zealand dollar weakness. That’s why we’re not down as much against Australian dollar or the euro, and we’re higher against the Japanese yen and the pound.

A lower currency is good for many of our exporters because it makes us more competitive.

Global dairy prices are almost ten per cent lower this year, but because the currency is down more than this against the US dollar, so our prices are actually up.

Many NZX-listed companies will enjoy a tailwind too, including the likes of Fisher & Paykel Healthcare, Mainfreight and Scales.

For the Reserve Bank, it’s not all great news.

About 40 per cent of the consumer price index is represented by tradables, which is basically imported inflation. A lower currency reduces our purchasing power across international markets, making things we import more expensive.

That could mean the Reserve Bank needs to work harder in response, by pushing the OCR a little higher or holding it there for longer.

In theory, a higher OCR should make our currency more attractive, driving it back up again and keeping a lid on those imported costs.

That’s why some people are talking about the need for emergency rate hikes from the Bank of England. It could stabilise the pound and help offset a worsening inflationary outlook.

Until recently, financial markets and the economy have taken rising global interest rates in stride. However, it feels like we’ve reached a tipping point where things are starting to get a little disorderly.

One thing in New Zealand’s favour is that we started earlier, which means we’re further through this process than others.

The Reserve Bank is forecasting an OCR peak of 4.10 per cent, so you could say that after Wednesday’s move we’ll be 85 per cent of the way there.

That will hopefully allow us to ease off at some point soon, although we need to keep an eye on other countries that risk overplaying their hand.