Here comes that interest rate rise

By Brian Fallow

With a rise in the OCR a near certainty this week, economists will look for clues on the extent of future moves.

Westpac is forecasting growth to accelerate to over 4 per cent this year. Photo / File
Westpac is forecasting growth to accelerate to over 4 per cent this year. Photo / File

A rise in the official cash rate from 2.5 to 2.75 per cent on Thursday is seen as a virtual certainty, so the focus will be on the Reserve Bank's economic forecasts and what they portend about the pace and extent of the tightening to come.

This would have to be a contender for the best-signalled monetary policy move in the country's history, Westpac economist Michael Gordon said.

"Interest rate markets have been tipping a March start date for several months, home owners are reportedly fixing their mortgage rates in greater numbers, and the latest ANZ Business Outlook found that a net 90 per cent of firms expect interest rates to rise over the next year - the highest reading in the 21-year history of this survey question."

A Reuters poll of 17 financial institutions found only one (Moody's) not expecting the OCR to be raised this week and a consensus is that it will be a full percentage point higher at 3.5 per cent by the end of this year.

In its December monetary policy statement the bank forecast gross domestic product growth over the next two years would outstrip the rate that is sustainable given fundamental factors like growth in the workforce and productivity, implying increasing inflation pressure albeit from a low base.

The economic data since then has if anything been stronger than the bank expected; September quarter GDP growth, for example, was 1.4 per cent when it had forecast 1.1 per cent.

Westpac is forecasting growth to accelerate to over 4 per cent this year. "The post-earthquake rebuild in Canterbury and rising house prices are now being joined by a sharp lift in export incomes, which is expected to flow through to additional spending and investment," Gordon said.

Reserve Bank expected to lift official cash rate this week

Deutsche Bank chief economist Darren Gibbs said: "Given further gains in business and consumer confidence (the former, in particular, at historically very high levels), continued surprising resilience in global prices for New Zealand's dairy exports and continued strong net migrant inflows, we think that the tone will be at least as upbeat as communicated previously."

He expects the interest rate track the Reserve Bank pencils in to consolidate market expectations that this year's policy tightening will be more frontloaded than projected previously, with further hikes of 25 basis points to be expected in April and June and possibly July, even with a firmer exchange rate profile than projected back in December.

Gordon said the March statement was likely to include an extra year of projections, out to March 2017, which would give a clearer idea of where the Reserve Bank sees interest rates peaking in this cycle. "We expect the updated projections to show the 90-day bank bill rate peaking just above 5 per cent, higher than the 4.5 per cent that the Reserve Bank judges to be its long-run 'neutral' level."

If New Zealand raises its official cash rate this week it will be the first developed country to do so since the global financial crisis. Some economists argue the economic story underpinning that is already understood and priced in by currency markets.

But ANZ chief economist Cameron Bagrie said New Zealand could ill-afford to get too far out of step with its global peers if the kiwi dollar was not to be turbocharged further.

"We are forecasting a relatively stop-start tightening cycle and a moderate endpoint by historical standards of around 4.75 per cent. Rises will quickly gain traction in the housing market as 73 per cent of mortgage debt is either at floating rates or fixed for 12 months or less."

- NZ Herald

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