OCR hike a foregone conclusion by economists and markets

The odds of a 25 basis points rise to 3% on Wednesday has been put at nearly 90% by the markets, with a 50% chance of a further rise in December.

While inflation for the third quarter dropped from 4.1% to 3.7% in the second quarter, a sharp fourth quarter increase in fuel, airfares, construction costs and the low New Zealand dollar is expected to push annual inflation to 4.5%, and an OCR hike next week.

However, the last thing the country needs now is an OCR hike, Alexandra Turcu and Elliott Lowe, Kiwibank economists say.  

Their opinion is based on inflation in the December quarter shaping up to be bad. “With record high shipping costs for oil into Asia, Kiwis will continue to feel the pinch at the pump.”

They say the question is whether domestic businesses will raise prices as a result. “If the last two quarters tells us anything about that, it’s that they can’t even if they want to. Consumers are spending more on petrol, rates and electricity (among other necessities) and have less to spend on everything else.

“Any business looking to raise prices will be faced by Kiwi households turning their backs and walking away.”

Turcu and Lowe say when the economy is recovered and wages are moving up enough to allow consumers the freedom to spend more, they expect the RBNZ will act accordingly and raise interest rates to help cool down the economy. But not now.

“We don’t need rate hikes at the minute. Of course, the financial markets expect the RBNZ to hike interest rates again next week, or December as it indicated in its September monetary policy statement.

“We say the RBNZ should get it over and done with if it is going to do it. Take the interest rate to 3% and hold there so we can have some stability.

“We don’t think a hike is needed at all, to be clear. But if the fear is that domestic prices will rise as a result of the oil shock (which they haven’t), then rip the band aid off and let us get on with trying to recover as an economy.”

Prudent approach

ANZ says core inflation measures lifted in the third quarter, and it expects the RBNZ’s monetary policy committee to conclude the most prudent course to get the OCR back to the 2% midpoint of its 1-3% range is an OCR hike now.

ANZ chief economist Sharon Zöllner says If the RBNZ doesn’t hike, the NZ dollar is likely to come under more downward pressure, from its already sharply lower starting point. “While the medium-term inflation outlook remains murky, it’s clear that that would be unhelpful.

The other big development has been the rebound in oil prices.

Zöllner says while the RBNZ looks through the first-round impacts on inflation, conscious that it is a negative for growth, higher headline inflation means higher risks of unhelpful persistent dynamics emerging via inflation expectations and wage demands.

“There’s no evidence of that happening yet, but it’s early days. Four of six committee members saw medium-term inflation risks as tilted to the upside at the last Monetary Policy Statement, and these developments will have done nothing to assuage those concerns.”

The bank is also expecting a relatively short statement that sounds open-minded about what comes next.

It has pencilled in a pause in December at the slightly more comfortable perch of “neutral”. “The data will dictate,” Zöllner says.

Path of least resistence

Westpac is expecting headline inflation to reaccelerate back over 4% before the end of this year, and to remain above the RBNZ’s forecast for most of 2027.

“In that light, we think the RBNZ will regard hiking the OCR on Wednesday as the path of least resistance to get inflation back under control,” Kelly Eckhold, chief economist says.

However, he says a monetary policy committee vote seems possible as differences in view will likely remain among the members about how much the medium-term inflation outlook has really shifted in recent weeks.

“On balance, the medium-term inflation picture will probably be judged to have worsened slightly given recent movements in energy prices and the exchange rate.”

While Eckhold expects forward guidance will leave open the option to raise the OCR further in December, he now thinks the OCR will hit 3.5% a meeting earlier in February. “Thereafter we expect further 25bp hikes at the June and September 2027 meetings, lifting the OCR to a peak of 4%.”

Slow inflation drop expected

ASB is concerned that inflation over 2027 could prove slow to recede despite favourable base effects.

The bank doesn’t expect annual CPI inflation to fall below 3% until the fourth quarter of next year. It will mark more than two years in which annual CPI inflation has been above 3%.

“This is not a good sign, particularly with price- and wage-setters more sensitive to inflation following the post-Covid era,” Mark Smith, chief economist says. 

“Our view is that persistence matters, irrespective of whether the underlying shock is demand or supply driven.”

ASB expect 25bp hikes in October and December and a 3.25% OCR peak.

“And risks to the OCR over 2027 are heavily skewed to the upside, with our OCR forecasts under review,” Smith says.

Upward pressure

While third quarter CPI inflation was a tick lower than the RBNZ’s projection for the quarter, BNZ senior economist Doug Steel doesn’t anticipate this will materially alter the RBNZ’s thinking for next week’s OCR decision, where the bank expects a 25bp hike.

A theme of the inflation data was that the price rises were becoming more widespread, he says. At 2.75%, the OCR remains at a stimulatory setting.

"The RBNZ can see the upward pressure on inflation still to come through from higher fuel prices and a lower NZ dollar.

“All along we thought the precise third quarter outcome was of secondary importance to what is shaping up in the fourth quarter, which, looks to be a long way north of the 3.9% that the RBNZ projected in its September MPS."