The Reserve Bank will review the Official Cash Rate (OCR) on Wednesday, in what bank economists anticipate will be the first of several rate rises over the coming months.
For 18 months, the wholesale cash rate has remained at an all-time low of 0.25 percent. The last time it went up was seven years' ago in July 2014, when it rose by 25 basis points to 3.50 percent.
In its August monetary policy statement, which coincided with the country moving into alert level 4 following the COVID-19 Delta outbreak, the Reserve Bank left the cash rate unchanged. The decision was made "in the context of the Government's imposition of level 4 COVID restrictions," the statement said.
Inflationary pressures, the tight labour market and rising house prices are reasons for the Reserve Bank to start removing monetary stimulus, economists say. The bigger-than-expected 2.8 percent lift in Gross Domestic Product (GDP) in the June 2021 quarter showed the level of economic momentum before the August outbreak.
Bank economists expect a series of 25 basis point hikes to the Official Cash Rate over the coming months, starting from Wednesday.
Kiwibank chief economist Jarrod Kerr told Newshub in line with its "least regrets" approach to uncertainty, he expects the Reserve Bank to start taking the cash rate "closer to neutral".
"This week's rate hike will be the first in a series of hikes towards 1.5 percent and possibly higher," Kerr said.
In line with previous forecasts, ASB continues to expect three rate rises, each by 25 basis points in October, November and February.
ASB chief economist Nick Tuffley, said although the spike in Auckland COVID-19 cases creates uncertainty over how long restrictions will last, inflation pressures and the tight labour market have "risen sharply" - and are likely to strengthen.
"The key issue is whether the Reserve Bank (RBNZ) wants to wait to see whether the prospect of a more drawn-out lockdown will make a material difference to the medium-term outlooks for inflation and employment," Tuffley said.
Ahead of Wednesday's cash rate announcement, wholesale markets have already priced in a 90 percent probability of a 25 basis point hike to 0.50 percent, Kerr said.
On Tuesday, standard two-year fixed retail mortgage interest rates offered by the top five banks ranged from 3.25 percent to 4 percent. Three-year rates ranged from 3.55 percent to 4.34 percent, five-year fixed rates from 4.29 percent to 5.04 percent.
ASB senior economist Chris Tennent-Brown said 1-year and 2-year fixed mortgage rates had already "lifted significantly" in anticipation of a cash rate hike.
But new borrowers and those coming off fixed interest rates still had the opportunity to lock in "still very low rates" by historical standards.
"The 2 and 3-year mortgages where people can lock in still very low rates (from just over 3 percent) are popular in the sense that the 5-year rate is already over 4 percent," Tennent-Brown said.
Borrowers concerned about interest rate rises over the medium term could weigh up paying a bit more now for added certainty.
"The longest fixed-term rates are halfway there...we're still thinking they'll end up in the 4-5 percent range over the next few years… and the 5-year rate is in that range now," Tennent-Brown added.
In direct contrast to borrowers, upwards moves on interest rates are positive news for savers, including those with money in savings accounts and term deposits.
The Reserve Bank will make an Official Cash Rate announcement as part of its Monetary Policy Review on Wednesday afternoon.