What will the RBNZ do to the OCR next week? Economists give their guesses

Picture: Chief economist Sharon Zollner

ANZ, ASB, BNZ and Westpac don’t think the central bank will opt to raise the OCR by 0.25% and their eyes will be on the Monetary Policy Statement to get a steer on when the bank believes it will have to start hiking.

ASB senior economist Mark Smith says holding the OCR at 2.25% is not without cost if it results in a more generalised and protracted uplift in inflation that will require monetary restraint to dislodge.

“OCR hikes are a matter of when and not if."

“Proactive monetary normalisation looks to be warranted, particularly with a troublesome short-term inflation outlook and with the 2.25% OCR below circa 3.25% neutral levels.”

The bank has pencilled in a July start to hikes but notes it would be unwise to rule out the RBNZ hiking the OCR next week.

“The RBNZ may choose to wait but they run the risk of having to undertake a more protracted tightening cycle. Waiting will add to the longer-term pain facing kiwis,” Smith says.

While Westpac chief economist Kelly Eckhold doesn’t think the RBNZ will opt to raise the OCR, he says there could be a live debate at the Monetary Policy Committee meeting on the option to raise it to 2.5%, with the decision likely going to a vote.

“A hike at this meeting would be well justified by the outlook for inflation."

His view is that the significant shift in the outlook, which has occurred since the OCR was cut below 3% in the second half of last year, justifies a hike at the May meeting.

“However, the RBNZ’s output gap focused framework, the absence of hard data on second-round inflation impacts, and the likely reliance on assumptions that will imply a significant fall in energy prices over the next year means we expect the OCR to remain unchanged next Wednesday,” he says.

Even so, Eckhold says the RBNZ’s forecasts for the OCR are likely to be revised up from the current 3% to something more like 3.2%, reflecting higher inflation expectations coming from the more elevated inflation forecast profile.

He says the outlook clearly has changed now that headline inflation is set to move above 4% for the balance of this year.

“It would be much better to have the OCR near neutral today. Hence beginning to get there now seems a pressing priority.”

A September start to raising the OCR is still BNZ chief economist Mike Jones’ call.

He says the fact market pricing already bakes in a chunky RBNZ tightening cycle will also limit how quickly mortgage rates rise this year.

“Three 0.25% OCR hikes are enshrined in pricing for this year, with a July start to the tightening cycle near fully priced.

“We continue to call a September start – acknowledging a still wide range of possible scenarios.”

Jones says all eyes at next week’s meeting will be on the RBNZ’s interest rate projections which, relative to February, he thinks will show an earlier start to hikes with a potentially higher end point.

While the outlook is far from certain, the ANZ thinks the RBNZ is becoming too uncomfortable with an OCR in stimulatory territory.

Chief economist Sharon Zollner expects the Monetary Policy Committee will conclude the risks of waiting too long outweigh the risks of causing unnecessary economic pain by hiking sooner than envisioned before conflict in the Middle East erupted.

The bank has pencilled in consecutive 0.25% hikes in July, September and October, taking the OCR to 3%, and while Zollner says it can’t rule out the possibility of a May kick-off, it thinks the committee will conclude that the benefits of going a little earlier (getting the OCR back to neutral a few weeks faster than otherwise) will not outweigh the potential costs (inducing an even sharper confidence shock).

“With the market already fully pricing in hikes from July, effective monetary conditions have already tightened meaningfully, and that allows the committee a little more pace than otherwise to communicate their strategy and prepare the ground.

Zollner expects the RBNZ to characterise OCR hikes as getting policy back to neutral, from which vantage point it will be better placed to wait and see how things unfold.

“Thereafter, we have the OCR staying on hold for an extended period. “In this uncertain environment, the odds of the two scenarios feel balanced – though that’s clearly not how the market is seeing it.”