Bollard set to raise OCR as inflation spike looms

Bollard will raise the official cash rate by a quarter point to 2.75% when he releases his quarterly Monetary Policy Statement at 9 a.m. in Wellington tomorrow, according to a Reuters survey. Of 18 firms surveyed, 15 predict a 25 basis point increase in the OCR, one forecasts a 50 bps hike and two say Bollard will wait until July to move.

Tomorrow's decision promises to have more bite than when Bollard last raised the OCR on July 26, 2007, when he lifted the rate to 8.25%, the highest since the benchmark rate was introduced in 1999. The average mortgage duration was sitting at around 12 months in March this year, while it peaked at almost two years in 2007.

Domestic economic conditions point to a rate rise tomorrow. Increases in goods and services tax and levies such as the Emissions Trading Scheme are expected to push the consumer price index well above 5% by the first quarter of calendar 2011. Business confidence measured by National Bank's own-activity index is at the highest in more than a decade and hiring intentions are at an 8-year high.

The jobless rate tumbled to 6% in the first quarter from 7.1% three months earlier, a record drop. Stronger commodity prices have underpinned Fonterra Cooperative Group's forecast for a higher milk payout next year and the kiwi dollar is trading near an 11-month low against the greenback, ensuring farmers capture more of the benefits of higher world prices.