Borrowing costs in New Zealand are poised to rise further as the country's central bank will likely follow its first rate hike in three years with a sequence of 25-basis-point increases, BNZ Research said in a Thursday report.
The Reserve Bank of New Zealand (RBNZ) on Wednesday raised its official cash rate (OCR) by 25 basis points to 2.5%, citing a need to reduce monetary stimulus as inflation remains above target. The move was broadly in line with analyst forecasts and "almost fully priced by markets," BNZ said.
While the RBNZ's latest inflation projections for the June and September quarters were well below the May forecasts due to a recent fall in oil prices, the outlook for medium-term inflation pressures remains uncertain. BNZ expects headline inflation to spike to a peak in the second quarter, with the annual consumer price index forecast to decline through the rest of the year.
Additionally, BNZ expects the country's gross domestic product to "contract slightly" in the second quarter, but said a third-quarter recovery "is looking increasingly assured as several indicators point to a pickup in growth momentum."
The market research firm anticipates further hikes taking the OCR to a peak of 4% by May 2027. In its core OCR scenario, the cashflow-based fair value estimate for two-year rates is around 3.75%.
"The retracement in two- and five-year fixed rates over the past month has created an opportunity to top up hedging, with rates likely to move gradually higher through the year," BNZ said.