The Official Cash Rate could start to rise as early as next year, a leading bank economist says.
On Wednesday, the Reserve Bank will deliver its first Monetary Policy Statement (MPS) for 2021. It will review the Official Cash Rate (OCR), a tool used to keep inflation (a measure of how fast the cost of everyday goods and services rises), between 1 and 3 percent. A lower OCR encourages Kiwis to spend and borrow more to stimulate the economy. A higher OCR supports saving.
Following a 75 basis point drop in March in response to the COVID-19 pandemic, the OCR has stayed at 0.25 percent for almost 12 months.
According to ASB's quarterly economic forecast released on Monday, the OCR could now start it's upward descent as soon as August 2022 - a year earlier than it forecast a few months' ago.
Heading further into 2021, ASB chief economist Nick Tuffley expects rises in construction activity to deliver a significant boost to the economy. Following the 14 percent jump in Gross Domestic Product (GDP) in the September 2020 quarter, GDP is forecast to finish the December 2021 quarter 0.7 percent up on the same time last year.
Inflation is nearing 2 percent, supporting employment. Unemployment (currently 4.69 percent) was previously expected to peak at around 6 percent. But now it's likely the peak has passed.
"The key difference between our outlook now compared to a few months' ago is it looks like inflation is getting up around the 2 percent mark and staying there later this year," Tuffley explained.
"The RBNZ's traditional weapon of choice (the OCR) is likely to remain at 0.25 percent into next year before it gradually lifts back from its emergency setting."
By early 2024, the bank expects the OCR to level off at 1.25 percent.
"We're just getting further along our recovery so much quicker and it means the need to keep putting the foot flat to the floor will gradually abate," Tuffley added.
This year, closed borders and weaker global growth are still likely to impact local economic performance, including exports. Availability of the COVID-19 vaccine - administered to the first group of Kiwi vaccinators on February 19 - has bolstered confidence, triggering a global sharemarket boom. But there are still risks around production delays and COVID-19 mutations reducing its effectiveness.
"In our view, it will be some time during 2022 before the New Zealand and global economies properly enter 'recovery mode' and allow for above-average rates of GDP growth," Tuffley added.
Although ASB has seen slight increases to wholesale interest rates, in the short-term, Tuffley expects the Reserve Bank Large Scale Asset Purchase (LSAP) and Funding for Lending (FLP) programmes to keep interest rates low.
"At the moment, we're at or near the lows of retail interest rates...over time, interest rates - particularly term interest rates - are expected to gradually start grinding a little bit higher," Tuffley added.
Kiwibank senior economist Jarrod Kerr and Infometrics senior economist Brad Olsen also expect the OCR to remain unchanged on Wednesday.
Before increasing the OCR, the Reserve Bank is likely to wait for sustained rises in inflation, employment and business investment.
"The Kiwi economy has performed remarkably well, and there's plenty of monetary and fiscal stimulus driving growth and lifting confidence," Kerr said.
"The RBNZ will remove the optionality around further rate cuts and revise their economic forecasts higher," Kerr added.
Infometrics currently expects the OCR to remain at 0.25 percent until 2024.
"The Reserve Bank is expected to note the stronger performance of the labour market and higher-than-expected inflation, but also sound caution over the pathway ahead, and a desire to see a higher trend for inflation and employment before any moves to change interest rate settings occur," Olsen said.