Economists have weighed in on how soon Kiwis will see interest rates rise again, as the Reserve Bank is expected to hold the official cash rate (OCR) steady today.
All five major bank economics teams – ANZ, ASB, BNZ, Kiwibank and Westpac – agree the OCR will stay at 2.25% when the decision is released at 2pm.
But it is what the Reserve Bank signals about the weeks or months ahead that has markets and mortgage holders watching closely.
Several of the big banks expect hikes to begin as early as July, with ANZ forecasting the OCR reaching 3% by December, and ASB and Westpac picking a peak closer to 3.25%.
That would mean higher mortgage rates for homeowners who had been enjoying relief after a string of cuts last year. The OCR was currently at 2.25%.
Speaking to BNZ Business Breakfast on Monday, Craig's Investment Partners investment advisory head Mark Lister said most did not expect the Reserve Bank to move today.
Financial markets see about a 20% chance of a hike today, he said.
"What will be of more interest will be the set of forecasts that they present in their monetary policy statement, and that is where they could lay the groundwork for an OCR hike at the next meeting in July."
Lister said markets were currently pricing in 1-1.25% of hikes over the coming year, taking the OCR into the 3% range. He added it would be "really fascinating to compare that sort of expectation with what the Reserve Bank sees over the next six to 12 months".
Kiwibank says hikes not needed
Kiwibank stands apart as it has done at previous rate calls.
Chief economist Jarrod Kerr said inflation was "spiking now, but demand is being destroyed in the process" and argued there was no case for rate increases this year.
He said the oil shock was "not something interest rates can fix" and that "hiking early will only kick the economy while it's down".
"It’s clear that the economic impacts of this crisis will have ripple effects that will last a long time. We’re starting to think a recovery may just be a mid-2027, early-2028 story now," he said.
"Short-term inflation, off the back of an international oil shock, is not something interest rates can fix. Especially when demand destruction is the result.
"An economy threatening to flat-line while fuel prices are elevated will need resuscitation, not further dampening. Hiking early will only kick the economy while it’s down. The fear that this will be another Covid situation is unwarranted.
"We weren’t the early bird catching the worm back then… but we can be the mouse that gets the cheese this round. If only the RBNZ will have the patience the market doesn’t."
Anna Breman spoke to Q+A about oil price uncertainty and whether the bank has the authority to mandate cash access. (Source: Q and A)
The split among forecasters reflects the difficult position monetary policy committee members find themselves in, caught between rising prices and a sluggish economy.
Put simply, the Reserve Bank uses the OCR as its main tool to control inflation – the rate at which prices for everyday goods and services rise.
Raising the OCR makes borrowing more expensive, which slows spending and helps bring prices down. But it also risks choking off economic growth, which is why the decision is so finely balanced.
The Iran conflict and the closure of the Strait of Hormuz have pushed the annual inflation rate to 3.1% – above the 1-3% target – and economists expect it to climb past 4% for much of the rest of the year.
At the same time, economic growth has come in below expectations.
Westpac's Eckhold says hike today could be justified
Westpac chief economist Kelly Eckhold said his personal view was that a hike at today's meeting "would be well justified by the outlook for inflation".
But he expected the Reserve Bank to hold off because it had not yet seen clear evidence of price rises spreading more broadly through the economy. Westpac expected there to be three 0.25% hikes by the end of the year.
BNZ head of research Stephen Toplis said the central bank had no choice but to raise rates eventually, writing last week that "you can't keep running stimulatory policy when inflation is problematic, no matter the cause".
But he said the question was one of timing, not direction, and that BNZ expected the Reserve Bank to buy itself more time before pulling the trigger.
Toplis warned businesses faced a tough road ahead regardless, saying "there will be two types of companies: those who pass on at least some of the price increases they face, and those that go broke".
"In other words, inflation will remain problematic even as the economy softens," he said.
ASB economists Jane Turner and Wesley Tanuvasa said there was no "smoking gun to hike in May".
"Timing OCR hikes is difficult. Valid arguments could be made to begin hikes in May, July or September. We do not rule out a hike, but data on the run-up to May have been mixed," Turner said.
"But waiting has trade-offs, including the risk of needing to raise the OCR higher than otherwise."
Turner said she remained sympathetic to what she called the "stitch in time, saves nine" argument for acting sooner rather than later.
Today marks the first OCR decision under a revised charter for the Reserve Bank's monetary policy committee, which means if there is a formal vote at the table, each committee member's position will be made public by name for the first time.
Westpac expects a vote will be required, and suspects two members of the monetary policy committee may push for an immediate hike.
ANZ expects it to signal roughly even odds of a rate hike in July, while BNZ said it would likely show rates peaking higher than previously forecast, though still "well below" what financial markets have been pricing in.
ANZ chief economist Sharon Zollner said the Reserve Bank was stuck "between a rock and a hard place", balancing the risk of hiking too aggressively against runaway inflation.
The bank said "a pause in May that sets up a hike in July seems like a decent middle ground", but acknowledged "this is a very hard one to pick".
Toplis put it more bluntly: "The Reserve Bank will be accused of tightening too quickly or too much and then be blamed for clobbering the economy, or it will be charged with tightening too late and be at fault for any resulting inflation.
"Who'd want to be a monetary policy committee member?"
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