ASB predicts the official cash rate (OCR) will increase next month if key data confirms that pressure is building.
The Reserve Bank confirmed on Wednesday the official cash rate is unchanged at 0.25 percent, but said it is reducing the level of its current policy settings. From July 23, it will stop buying bonds under the Large Scale Asset Purchase (LSAP) programme that was introduced in March 2020. The programme has been nicknamed 'money printing' because it injected cash into the economy to help reduce business and household borrowing costs.
ASB chief economist Nick Tuffley says their new forecast of an OCR increase is highly conditional on the strength of data over the next six weeks.
"It's a fine line but we now expect the RBNZ will lift the OCR in August - provided key data between now and then are sufficiently strong to support the need for earlier removal of stimulus," he says.
Before the Reserve Bank's announcement on Wednesday, ASB forecast a cash rate hike for November.
Tuffley says the timing and pace of cash rate rises will depend on the extent of costs passing through to inflation, the degree of labour underutilisation, wage inflation, and general inflation expectations.
"The RBNZ has clearly changed tack to decide that the time for reducing monetary stimulus is very near. The risk of inflation and employment undershooting its objectives has switched to a risk of overshooting should the current level of stimulus remain in place. Lifting the OCR before too much longer will give the RBNZ a better balance of the various risks," he says.
But imminent OCR increases are based on events going smoothly over the coming months, he adds, and uncertainties "remain huge", especially given how quickly COVID-19 can change the situation.
"A lot can go wrong, even as NZ's economy has hit growing pains so quickly. Gingerly removing some of the stimulus soon does seem to be the path of least regret, particularly as low interest rates have already played a strong role in boosting the economy back up and contributed to an overheating housing market in the process," Tuffley says.
While the official cash rate is still at a record low 0.25 percent, the Reserve Bank says the economy continues to perform better than expected through COVID-19.
"Aggregate economic activity is above its pre-COVID-19 level. Household spending and construction activity are at high levels and continue to grow," a statement says.
It expects inflation to rise in the June and September quarters.
"These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs."
The next cash rate announcement will be made as part of a fuller Monetary Policy Statement, to be released on August 18.
Earlier on Wednesday, ASB announced rises across its fixed-term mortgage rates and term deposit rates, affecting new borrowers and those with mortgages due to roll over.
Borrowers through ASB wanting to fix a rate for one or two years are now paying 2.55 percent and 2.95 percent respectively, the five-year fixed rate closing in on 4 percent. Other major banks are still offering customers one and two-year mortgage rates from 2.19 percent and 2.55 percent.