Rate hike on, but not a done deal

You can expect the Reserve Bank to hike its official cash rate next week, and floating rates will follow suit. However, what the central bank says and where interest rates will go after next week is less certain.

Friday, July 18th 2014, 1:20PM

The mortgagerates.co.nz survey of economists shows that all but two of them expect the OCR to increase by 25 basis points. The consensus is that although dairy prices and the latest inflation numbers were relatively benign, an increase is likely.

One change though is that very few economists are 100% sure of their predictions. Some like Westpac's Dominick Stephens (pictured) give it a 70% probability and say it's not a "done deal".

Deutsche Bank economist Darren Gibbs says that, on the back of recent data, the need for a hike next week is less certain in than for earlier OCR announcements. However, he says the RBNZ will: "Conclude that one further 25 basis point hike, at this stage, is unlikely to constitute a gross policy mistake."

The theme coming through from economists is that Reserve Bank governor Graeme Wheeler will want to reinforce the message about the need to tighten monetary policy and get the cash rate back to neutral, while at the same time pausing.

Gibbs expects that the OCR will be left "unchanged for a period to allow some time to pass to better assess the impact of the first 100 basis points of policy tightening, as well as to better assess the outlook for housing, the exchange rate and commodity-based incomes.

"Given ongoing concerns about the housing market we think that the RBNZ will want to avoid giving any signal that would encourage a decline in longer-term interest rates, and thus fixed mortgage rates - after all, the purpose of raising the OCR on 24 July is to tighten monetary conditions, not loosen them.'

Most economists in the mortgagerates.co.nz survey thik that there will be no further OCR rises until the December announcement. However views are split here with 10 economists saying yes and five saying no.

A clear message is that there is still more tightening to go with the majority expecting the OCR to peak at around 4.50%, which is 1.25% higher than the current rate.

Tags: OCR forecasts