Will it be a 25 or 50 basis point rate increase this week?

Economists are sure the Reserve Bank will increase the official cash rate this week, but are divided on the size of the increase.

The OCR will rise for a second consecutive time on Wednesday, according to a consensus of economists.

If so it will only be the second time the RBNZ will have raised the rate consecutively since 2014.

At Official Cash Rate (OCR) review, rechristened the Monetary Policy Review (MPR), the rate rose in October from 0.25% to 0.50%.

Westpac now expects a further rise of 25 basis points to 0.75%. But it says under the RBNZ’s own criteria, it is possible to make the case for a 50 basis point move, to 1%.

As a result, the market has been factoring in a 30-40% hike in retail rates. That will cause market volatility whichever way the RBNZ goes.

ANZ has today raised its one to three year fixed rates by between 20 and 30 basis points.

The ANZ is also expecting a rise of 25 basis points to 0.75%, and it also attributes this to a buoyant economy, low unemployment and inflationary risks.

The only issue is whether the rise will be 25 or 50 bps. ANZ is favouring a 25 point rise by odds of 60: 40.

ANZ says monetary conditions have already tightened quite a bit with mortgage rates rising at the fastest rate in 15 years.

It adds inflation, which is 4.9%, is likely to reach 6%, and the base rate will reach 2% by the end of next year. 

ASB is also forecasting a 25 basis point rise, but it adds a rider: the risk of a 50 basis point rise is “live”, to quote the bank's language, and not just for November, but for February as well. 

But the bank says the balance of probability is for a 25 point rise, largely because the market has raised interest rates anyway, thereby doing the RBNZ's work for it.

ASB is forecasting a peak OCR of 2.5%.

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