Economists pick Reserve Bank to raise OCR this week

Gyles Beckford RNZ

Another interest rate rise from the Reserve Bank this Wednesday seems a foregone conclusion. 

Decade high inflation, decade low unemployment, rising wage pressures, and record house prices are seen as compelling reasons for the central bank to press on with the tightening policy started last month.

Economists are near unanimous that the official cash rate (OCR) will be raised 25 basis points, a quarter of a percentage point, to 0.75 percent, with a minority view that a 50 basis point rise to 1 percent is possible.

Salt Funds Management economist Bevan Graham said there are arguments for a smaller or bigger rise.

"The key risk is that Covid is still in the community, there's economic risk and uncertainty and there's a longer recovery this time round, because Auckland is just coming out of lockdown, that argues for going slowly.

"But there's an economic risk, from an inflation point of view they're already behind the curve ... growth has been higher, the labour market has been tighter, inflation is higher inflation expectations are also higher, so the risk is if they don't move a bit faster then getting to 2 percent or wherever they think is neutral won't be sufficient."

But regardless Graham said a regular pattern of rate rises could be expected in the first half of next year to get the OCR to at least 2 percent.

ASB senior economist Mike Jones is expecting a "hawkish" statement and economic forecasts, to keep the pressure on financial markets which have been raising business and consumer interest rates in anticipation of further OCR rises.

"Most obviously, the market is already doing the RBNZ's tightening work for it. Since the October meeting, wholesale interest rates have surged another 50-100bps. In turn, mortgage rates have also roared higher.

"Mortgage rates are still at low levels historically. But that sort of rate of change - if sustained - will exert a powerful slowing effect on the housing market and retail spending next year ... the (Reserve) Bank will want interest rate markets to keep doing the mahi for it," Jones said.

He said the RBNZ's forecasts of future rate rises might indicate the OCR reaching a higher level than previously, perhaps around 2.5 percent, and at a sooner date than the 2024 indicated in August.