OCR preview: Will RBNZ go big, play safe or chart middle path?

Despite talk of a double-hike for the Official Cash Rate this week, local economists are sticking to expectations that Reserve Bank will deliver a more standard 0.25 basis point increase.

Regardless, New Zealand is likely to be the first nation in the developed world to lift rates, unwinding emergency stimulus put in place as the pandemic hit last year.

“We expect a 25-basis-point increase in the Official Cash Rate at next Wednesday’s Monetary Policy Statement, and a projection for several more hikes over the next couple of years,” said Westpac chief economist Michael Gordon.

“Raising interest rates now would put the RBNZ ahead of its overseas peers by quite some margin – we expect the US Federal Reserve to hold off until late 2022, and the Reserve Bank of Australia until early 2023”.

Eliminating the spread of Covid had allowed the domestic economy to build up a head of steam over the last year, and the “emergency” monetary policy settings that were introduced last year were no longer needed, he said.

“As Governor [Adrian] Orr reportedly said in a speech last month, this isn’t a conversation we’d be able to have in any other country”.

ASB and ANZ economists have both raised the possibility that the RBNZ could consider delivering a double hike (of 50 basis points) in order to get ahead of inflation and current market expectations.

But both have left their official forecasts in place for a single, 25-basis-point hike.

“We would not rule out a 50bp hike along the lines of ‘while the going’s good’, but think the RBNZ is likely to go for a more measured approach, with follow-up hikes in October and November,” said ANZ chief economist Sharon Zollner.

This was the first hike of the cycle, in a highly uncertain environment where the world could change any second and flexibility is therefore valuable, she said.

But Sydney-based Capital Economics has called more definitively for a 50-basis-point move.

“The New Zealand economy is clearly overheating and the Bank’s mandates for both inflation and the labour market are now fulfilled,” said economist Ben Udy.

“We expect the RBNZ to hike the OCR by 50bps at its meeting on Wednesday, August 18.

“And with the unemployment rate likely to fall further, and inflation set to remain above the mid-point of the bank’s target, we think the bank will hike rates to 1.50 per cent by the middle of next year”.

The big question for many economists is where New Zealand’s economy currently sits with regards to the Reserve Bank’s often-stated policy of following a “path of least regrets”.

“A lot could go wrong for the economy. The most obvious sword hanging over our collective heads is the risk of a Delta-variant Covid-19 outbreak, necessitating a return to lockdowns,” said ANZ’s Zollner.

There was still a reasonable case that could be made for holding rates where they were, she said.

Zero, 25 or 50bps calls were all possible outcomes “and could be justified without a blush”, she said.

“We’d put 10 per cent odds on no hike, 65 per cent on 25bps, and 25 per cent on 50bps”.

Westpac’s Gordon said defining “least regrets” was ultimately subjective.

“Initially, ‘least regrets’ meant doing everything that it could to support the economy’s recovery. By early this year, it meant waiting until it was certain that inflation and employment were on track before tightening,” he said.

“But by July the RBNZ had concluded that the risk of waiting too long, and letting inflation pressures get out of hand, outweighed the risk of another Covid shock in the near term”.

While waiting a few months would make little difference in terms of economic outcomes,those extra months could make a big difference in terms of our vaccination rate, and our ability to manage an outbreak of the more contagious Delta variant, he said.

“On the other hand, if New Zealand were forced into another lockdown, there is nothing to stop the RBNZ from immediately reversing any hikes it had made.

“The economic cost of a brief period of higher interest rates would also be minimal; the ‘regret’ would largely be felt by the RBNZ itself, in terms of the cost to its reputation. And the RBNZ has already indicated that it’s willing to take that risk”.

The announcement will be made at 2pm on Wednesday.

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