OCR decision: Another double-hike on cards

The Reserve Bank is expected to announce another double-hike to the official cash rate (OCR) later on Wednesday as New Zealand continues to face cost-of-living pressures.

A 50 basis point increase would be in line with what the main banks are expecting and would see the OCR hit 2 percent, the highest it’s been since September 2016. This would also put the rate at its ‘neutral’ level.

“There seems little doubt that unless something dramatic comes out of left field, the RBNZ will deliver another 50bp hike at its Monetary Policy Statement (MPS),” ANZ’s chief economist Sharon Zollner writes.

She pointed to the staggering level of inflation recorded in the year to March as well as the fact that the 50 basis point increase in April faced “little pushback”.

But eyes will also be on the Monetary Policy Statement which will set out the RBNZ’s expectations for the OCR over coming years. In its most recent statement, released in February, the bank forecast the OCR to hit 2.2 percent by December and rise to 3.4 percent by September 2024.

Given core inflation developments since February, ANZ is expecting “a slightly higher OCR track endpoint being spat out of the RBNZ’s model”.

“Any fiscal surprises will also need to be built in. We, therefore, expect a slightly higher OCR track to be published. However, given the RBNZ is likely to want to put some kind of lid on future OCR expectations (as they did in April), they may decide to do a small fudge to leave the endpoint unchanged.”

BNZ is also picking a 50 basis point rise for Wednesday.

“The Reserve Bank’s task is clear,” head of research Stephen Toplis says, “At its most basic level it has to get current annual inflation of around 7.0 percent down to 2.0 percent and it will require the unemployment rate, now 3.2 percent, to rise to around 4.5 percent to meet its maximum sustainable employment objective.”

“The only way the RBNZ can achieve this is to keep raising interest rates until it gets the traction it desires. And so it will.”

Toplis doesn’t see any need to change the peak forecast rate, but does believe the OCR track between now and then will be pushed upwards.

“At its April review, the RBNZ said that its 50-point hike was consistent with the interest rate track published in February. A further 50-point hike, which is what we expect, would not be consistent with that track. Consequently, the very fact the RBNZ will have moved rates 100 basis points over two meetings indicates a more hawkish stance.

“Moreover, we expect the Bank to produce a track which, effectively, brings forward the remainder of the tightening cycle from that which it published in February.”

BNZ believes the RBNZ will have the OCR at 3 percent by November, something February’s Monetary Policy Statement didn’t have set down until the middle of 2023.

“If it does raise interest rates in this manner, the pace of increase will have been the most aggressive witnessed since the Bank began inflation targeting.”

Westpac is also expecting the OCR in December to be far above the 2.2 percent forecast in February.

“We now expect the Official Cash Rate to reach a peak of 3.5 percent by the end of this year,” says acting chief economist Michael Gordon. “That will mean some quite aggressive tightening over the coming months, but that just reflects the scale of the inflation challenge.”