OCR: The clues an interest rate hike could be on the way

The Reserve Bank is unlikely to say when it's expecting to raise interest rates ahead of time, an economist says, but there will be clues to look out for. 

The bank's latest monetary policy statement will be released on Wednesday, ahead of next month's decision on the official cash rate (OCR). The OCR has been a record low for the past year, stimulating borrowing and spending to keep the economy ticking over during the biggest economic shock in a generation, if not longer.

But with an economy that's "reasonably fired up" and unemployment trending downwards, economist Cameron Bagrie says the bank will be starting to think about raising the OCR again, to keep inflation in check. 

"They'll want to be pretty patient, but slowly but surely all the pieces are falling into place for interest rates to move up and some stage down the track - with an emphasis here on 'some stage down the track'," he told The AM Show on Tuesday. 

"We don't know precisely when. We've got an economy that's reasonably fired up, the Budget projections were pretty optimistic in regard to where New Zealand is going to be."

The latest Budget also included about $110 billion in spending, up about 25 percent on pre-COVID Budgets and locking in last year's massive boost, at least for now. 

"The New Zealand Government is sending an awful lot of money out the door," said Bagrie. 

"Budgets are becoming bigger and bigger... that's a factor for monetary policy. The more work that the Government is doing, the less the Reserve Bank needs to do on the other side. 

"So will the Reserve Bank flag anything urgent tomorrow? The answer is no, but slowly but surely the blocks are falling into place. Interest rates are going to be moving up at some stage."

While the Reserve Bank won't say in advance what its plans are, Bagrie said there are some things to look out for which are likely to come ahead of a hike.

"If you signal it, the market's going to jump the gun... you're telling the market what you could be doing down the track. That's when you can get a pretty strong market reaction, and the Reserve Bank will be pretty wary of that. 

"If they put in the market some sort of flag that interest rates are going to be moving up, then you're going to see the New Zealand dollar up pretty quickly, which will hurt the export sector."

Bagrie said the bank has an "awful lot of other mechanisms" like big-spending asset schemes and its cheap lending for banks programme that will go first. 

"The Reserve Bank, before lifting the official cash rate, will have to lay out some sort of exit strategy for those. They'll be the first cabs off the ranks - it won't be the official cash rate." 

The next OCR announcement is due in mid-July.