Risk of higher OCR this year

The strength of the New Zealand economy has heightened the risk of a higher official cash rate by the end of the year, according to ANZ economists.

Friday, June 25th 2021, 3:15PM

Recent GDP has surpassed expectations, and with inflation also tracking higher, the bank's economists say there's an outside chance of a rate hike this year.

GDP growth at 1.6% in the first quarter was significantly stronger than expected, prompting the ANZ team to predict rate hikes in February next year.

The ANZ team, led by Sharon Zollner, said the Q1 data would prompt the RBNZ to upgrade their estimates around how stretched the economy is, "an earlier lift-off in their OCR forecast".

The economists warned that the central bank could be caught flat-footed and be forced to raise rates too quickly, leading to an economic shock.

"The balance of risks has abruptly and firmly tilted from one potential regret (hiking too soon) to the other (hiking too late)," the team said. "The simple fact is, there is now absolutely no reason to have the OCR at such extreme lows, and the sooner it rises, the better – a late scramble would imply more hikes, faster, thereby increasing the odds of a hard landing – for the housing market in particular."

The team added: "The RBNZ wanted to run the economy hot; they’ve achieved it, in what’s a mix of strong demand and constrained supply. The housing market is dangerously strong, households are spending freely, businesses are employing and investing, inflation is threatening to go well outside the top of the target band, ANZ Business Outlook inflation expectations are above the target band midpoint and rising, costs are soaring, and the labour market is extremely tight.

"Unlike some central banks, the RBNZ isn’t afraid to change its mind when the facts change, and good on them. While downside risks absolutely could still eventuate, the more pertinent risk here and now is that we’ll see a higher OCR before the year is out."

Tags: ANZ economy GDP housing market OCR OCR forecasts