Expect more interest rate increases

Another hike is coming in the Official Cash Rate this Thursday, economists predict.

Tuesday, April 22nd 2014, 12:00AM

by The Landlord

Mortgagerates.co.nz’s latest survey of economists found they all expect the Reserve Bank to move the rate by 25 basis points again, which would take it to 3%.

That would likely spur further increases in floating rates, which have lifted since the rate first moved in March.

But they are split in their views on how many more increases there could be this year.

ASB and HSBC expect another two – in July and December. ASB predicts a peak of 4.5% at the end of 2015.

ASB economist Chris Tennent-Brown said: “We don't expect the RBNZ will give a fresh signal on the extent of the tightening cycle. But there is a risk the RBNZ sounds equivocal about the likelihood of a third consecutive OCR increase in June. Key signs to watch for are any discomfort over the extent to which dairy prices have fallen and to the further lift in the NZD since RBNZ’s first OCR increase.”

He said: “We expect the RBNZ will complete three OCR increases by the July OCR window, and ahead of the April OCR meeting still favour July over June as the timing of the third of those increases.”

But he said if the Reserve Bank didn’t show any doubts in its statement next week, that prediction could change.

Infometrics expects increases at every meeting except October, to a peak of 5.25% in mid-2016.

BNZ expects increases at every meeting except September, and a peak of 5% in late 2015. It says at 3% the rate will still be well shy of could be considered neutral.

Its economists said: “There are increasing risks that the rate hiking will not be as aggressive as previously signalled by the RBNZ as a result of the NZ dollar being higher than the bank had anticipated and especially so relative to falling (dairy) commodity prices. Lower current inflation adds to this risk. We will be most interested in any discussion around the NZ dollar/commodity price interface and its implications for the OCR outlook ahead.”

Forsyth Barr expects three 25 basis point increases this year but said the Reserve Bank might need to adjust its interest rate path given the recent soft CPI figures.

Westpac’s chief economist Dominick Stephens acknowledged that there had been less inflation pressure since the last announcement than the Reserve Bank might have expected.

“But the extent of the downside developments does need to be kept in perspective. If five weeks ago the RBNZ was thinking about pushing the OCR up by 200 basis points over two years, then they are probably now considering a number more like 175bp. That is not nearly enough of a change to kibosh the April hike - we still expect the RBNZ will lift the OCR to 3% next week, as markets expect.”

He said the messages next week would likely be the same as came from the bank in March. “The economy is gathering momentum, construction is booming, inflation pressures are building, and therefore the OCR needs to rise. If we are correct, and that is still the main message, then we can be reasonably assured that the RBNZ still expects to hike the OCR in June – again, as we and the markets currently expect.”

He said it was the prospect of a July hike that was becoming more doubtful.

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