The Reserve Bank will continue monetary policy tightening on Wednesday, according to bank economists who also believe the official cash rate (OCR) will rise to higher than initially thought after last week's Government Budget.
Westpac's forecasts were revised last week to anticipate a 6 percent OCR peak, having previously predicted a 5.5 percent climax.
That shift came after the Government Budget, delivered by Finance Minister Grant Robertson on Thursday, provided more expansionary fiscal spending than expected.
While inflation slowed to a 15-month low in March, the consumer price index and the OCR were now expected to stay higher for longer.
Other major banks including ANZ and Kiwibank were also predicting a 25bp rate hike, while ASB anticipated a larger 50bp increase. ANZ, however, did not rule out a 50bp hike.
"With Government spending earmarked to inject another 1.4 percent of GDP into the economy over the coming fiscal year, the odds of another 50bp hike have risen and a pause seems [even] less likely," ANZ's economists noted.
"We'd also put greater odds on the May MPS (monetary policy statement) showing a higher OCR forecast peak than our 5.7 percent expectation. A 6-handle can't be ruled out."
But Robertson disagreed further hikes were needed.
"I don't think there's any cause for that in the Budget numbers that are here today," Robertson told Newshub Nation last week, adding: "When you actually look at the extra spending that we're doing, in terms of cost of living type stuff, it's modest."
Ahead of Wednesday's MPS, Robertson said the Government had made decisions that wouldn't "put undue pressure on inflation".
"We have thought about that in the process that we've been through. The big difference that we do have between what we were saying at the end of last year and now is the cyclone and the impact of that, and I think all New Zealanders would want us to be able to support people through that."
The Treasury has said inflation was expected to come in at 6.2 percent this year, down from the current 6.7 percent, while the Government's economic policy advisor had interest rates peaking at 5.25 percent.
Robertson told Newshub Nation the Government and the RBNZ had "slightly different roles in the economy".
He said the RBNZ's job was to get inflation down between 1 and 3 percent which, based on Treasury's forecasts would happen by 2025.
The Finance Minister also accepted some of its response to Cyclone Gabrielle "may have some of an impact" on interest rates "but, actually, it's more about what happens with the demand within the economy to recover and rebuild" from the weather event.
For full coverage of the RBNZ's 2pm OCR decision, visit Newshub.co.nz/money.
