Bank economists agree on another 50 point hike in the OCR

There is general unanimity that another big rise in the base interest rate will happen on Wednesday.

Monday, July 11th 2022, 9:22AM

by Eric Frykberg

Inflation is just too strong for the Reserve Bank to do anything else.

ASB economist Nathaniel Keall is among those forecasting a third consecutive 50 basis points rise. The effect of this will be to push the OCR to 2.5%.

He argues the probability of another such jump is 95%.

Keall adds since the RBNZ’s May Monetary Policy Statement, the international and domestic outlooks have worsened from an already low level.

He says local business confidence is already in the gutter, which could mean a recession is on the way.

Despite this, the RBNZ faces the same challenges as before. It is still supposed to keep inflation between 1% and 3% and the current level of 6.9% is way outside those constraints.

“Right now, inflationary pressures remain very lofty and are underpinned by severe capacity constraints, with no clear signs that forward-looking inflation expectations are peaking,” Keall said.

Westpac's acting chief economist Michael Gordon is also forecasting a 50 basis point increase on Wednesday.

He adds that is a near unanimous view of the market, even though pricing has “flirted” with the idea of a 75 basis point increase at times.

Gordon argues a big hike in the OCR is needed because inflation is running hot, but he adds the risk of an economic slowdown will also figure in the RBNZ's thinking.

ANZ economists are so sure of a 50 point rise they describe it as a “shoe-in”.

They say inflation and labour market pressure remain intense.

As with the other banks, the ANZ warns of low consumer confidence, stemming from surging inflation, declining real wages and a sharp rise in interest rates which are designed to curtail the other two factors.

But also like the other banks, the ASB team warns that inflation is clearly “dangerously strong and the policy prescription is obvious: keep hiking until inflation starts to ease.”

Tags: ANZ ASB Westpac