High inflation, house prices likely to force OCR rise this week – economists

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.