More interest rate hikes expected from the RNBZ

New Zealand economists expect the official cash rate (OCR) to rise to 1.5 per cent next year. This follows the Reserve Bank of New Zealand’s lifting of the OCR by 25 basis points to 0.50 per cent yesterday.

Michael Gordon, acting chief economist at Westpac New Zealand, observes: “There is substantial evidence that demand in the New Zealand economy was running hot before the latest COVID-19 lockdown. And, the evidence so far suggests that, as in previous lockdowns, activity is capable of bouncing back quickly as restrictions are eased.”

Gordon expects to see further rate hikes at the reviews in November, February and May, taking the cash rate to 1.25 per cent.

“Beyond that, we expect the pace of further hikes to be gradual, as the RBNZ starts to converge on what it would consider to be a ‘neutral’ level of the cash rate.”

Sharon Zollner, chief economist at ANZ New Zealand, forecasts hikes in November and February, and then a cautious series of hikes taking the OCR to 1.5 per cent by August next year.

She says the RBNZ’s review can be summed up in one quote: “The current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August statement.”

The RBNZ said the reasons for this were household and business balance sheet strength, ongoing fiscal policy support and the strong terms of trade. Robust business sentiment was noted, as well as the vigorous bounce that followed restrictions last time. In this environment, immediate relative price shocks risk leading to more generalised price rises.

Nick Tuffley, chief economist at ASB, also expects more hikes. He says: “Our outlook remains that the RBNZ will lift the OCR 25 basis points in November and February to 1 per cent, before gradually nudging up to 1.5 per cent by the end of 2022.”

“For the time being, the RBNZ does not see the lockdown to date as materially altering the outlook, says Tuffley. “However, the outlook is fluid, and the extent and duration of COVID-19 restrictions are highly uncertain. It is possible there will be more economic scarring that does change the outlook sufficiently that the RBNZ does temper its views on how quickly or far it needs to lift the OCR.”

In its statement yesterday, the RBNZ again said inflation was expected to spike above 4 per cent in the near term before settling at around the 2 per cent target midpoint in the medium term.

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