New Zealand's Anna Breman chairs first central bank meeting as rate hike chatter grows

By Stella Qiu

WELLINGTON, Feb 18 (Reuters) - New Zealand's first female central bank chief Anna Breman chairs her debut meeting on Wednesday, with rates widely expected to stay on hold, but markets will zero in on its rate projections for any hints of a hike this year.

The Reserve Bank of New Zealand is widely tipped to keep its benchmark official cash rate unchanged at 2.25% as the economy slowly pulls out of a slump caused by punishing policy tightening since COVID to tame runaway inflation.

Although New Zealand's on-the-ground recovery remains fragile, markets have been quick to price in policy tightening.

A September hike is seen as a 70% probability while a move in October is fully priced in after inflation accelerated to 3.1% in the fourth quarter, above the 1% to 3% target band. 0#NZDIRPR

Analysts are keen to see if the RBNZ sticks with mid-2027 as the window for a possible hike and to hear how new governor Breman sees the outlook.

"On the one hand, she'll want to establish her inflation fighting credentials and acknowledge that both activity and inflation are a bit higher than expected, but at the same time not scare the horses," said Sharon Zollner, chief economist at ANZ.

"There's been a very sudden turn. For many people, it would have been quite unexpected that the conversation changed from how low can rates go to how high are they going to go? I have already missed the bottom."

Indeed, the economy returned to growth in the third quarter but only after a long period of outright decline. Employers added to their headcount for the first time in over a year but the jobless rate hit a decade high of 5.4% and New Zealand saw another big year of losing its citizens mainly to its bigger neighbour Australia.

The housing market remained soft in January, with prices unable to extend the small lift seen at the end of last year. Property markets in main cities like Auckland and Wellington are still down over 20% from their peaks around late 2021.

Expectations of rate hikes have already lifted two-year swap rates NZDSM3NB2Y=, a key benchmark for lenders setting mortgage rates, by almost 40 basis points since RBNZ's last policy meeting in November.

"I don't think the Reserve Bank will necessarily want to endorse the hawkish views out there in the market this time around," said Kelly Eckhold, chief economist at Westpac NZ.

However, he cautioned such messaging would not necessarily rule out a rate hike this year.

A Westpac survey showed 75% of clients expected one rate hike to 2.5% by the end of the year, even though they see Breman as neutral to slightly dovish.

"The main thing, I think, that will drive them to raise rates towards the end of this year is when they get confidence that the economy has recovered... And I think it will take them a while before they get that confidence."