Another official cash rate hike is a near certainty when the Reserve Bank delivers itsMonetary Policy Statement on Wednesday.
In fact, with inflation running hot and only expected to get worse, speculation has again turned to whether the RBNZ will deliver a double (0.5-basis-point) hike.
Last month the official cash rate was lifted from a record low 0.25 per cent.
The 25-basis-point hike was the first for the RBNZ in seven years.
Since then, the spread of Delta through New Zealand has done little to dampen inflation expectations and most economists expect rates to keep rising in 25-basis-point increments until at least the middle of next year.
A 50-basis-point double-shot was possible but the bank could look to achieve a similar result by talking tough about the rate rise path ahead,ANZ chief economist Sharon Zollner said.
“Given recent upside surprises to both inflation and employment we would not rule out a 50bp hike. But the RBNZ can achieve a similar tightening in financial conditions with lower risk via a significantly higher OCR endpoint forecast,” she said.
Annual consumer price index inflation came in well above forecasts at 4.9 per cent for the September quarter.
Unemployment – the RBNZ’s also mandated focus – also surprised for the quarter, coming in near a record low at 3.4 per cent, with strength in employment growth.
“The labour market is the tightest it’s ever been and inflation pressures are intense, but on the other hand the housing market cycle is looking very mature,” Zollner said.
“And there’s the small matter of Covid spreading its way around the country.”
But on balance, the case for tighter monetary conditions was very clear, she said.
Adding to the upwards rate pressure this week, the Reserve Bank’s survey of inflation expectations showed two-year-out inflation expectations running at 2.97 per cent – a 13-year high for the survey.
Economists all lean towards a 25-basis-point hike, but few are brave enough to rule it out.
Markets are also hedging their bets, pricing in a theoretical rise of 36 basis points.
“To our minds, both the November and February meetings are ‘live’ chances for larger 50bps hikes,” ASB senior economist Mike Jones said.
“But we continue to favour 25bps increments for now largely because the market is already doing significant tightening work for the RBNZ.”
Mortgage rates have already risen sharply in recent weeks – at the fastest pace in 15 years by some measures.
Special mortgage rates for a one-year fixed term at the main trading banks have risen to between 3.45 per cent and 3.65 per cent compared to six months ago when they hit lows of 2.25 per cent.
Banks are offering two-year fixed-term rates of between 4.15 per cent and 4.35 per cent, compared to 2.5 per cent six months ago.
Expectations about the path for the next year are a big driver of the retail interest rates and this week’s MPS will be watched closely for any further clues.
The RBNZ will want to maintain that market pressure given the long break until its next rate call in late February, Jones said.
“So expect a hawkish statement with upgrades to the bank’s inflation and OCR forecasts.”
ASB is picking the OCR will keep rising to about 2.5 per cent.
Westpac’s Ready Reckoner calculation suggests fresh data since the August MPS implies the official cash rate will peak 0.7 higher (at 2.7 per cent by Q3 of 2023 compared with RBNZ’s August projection of 2 per cent).
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