The Reserve Bank is expected to increase the official cash rate by 50 basis points. Photo / NZME
The Reserve Bank is expected to increase the official cash rate by 50 basis points. Photo / NZME
A 50-basis-point hike in the official cash rate (OCR) this week from the Reserve Bank is looking like a done deal.
What happens after that is far less certain.
The market consensus is for a half-point rise to 2 per cent as the Reserve Bank tries to rein in inflation,which hit 6.9 per cent in the March year.
Aside from the likely rate hike, the Reserve Bank's monetary policy statement is expected to carry a nuanced message on the likely path of interest rates for the rest of the year and beyond.
Market expectations had previously been for a series of 50 basis point hikes following on from Wednesday's rate call, but economists now are not so sure.
"It looks like 50 basis points is done and dusted, in the market's eyes, but the July (monetary policy committee) meeting is more of a 50/50 call as to whether they will go by 50 basis points again, and I certainly would not rule that out," BNZ economist Doug Steel said.
"The market is a bit divided, but our view is they will go by 50 basis points this week and then revert to 25 from then on," he said.
Steel said the week's move is likely to make the official cash rate neutral, or close to it.
"Once you reach that point you are starting to put a brake on the economy.
"Inflation is high and rising, but once you get past that neutral mark there may be a case for treading a little more carefully."
Steel noted the demand indicators such as house prices and consumer confidence surveys were already in decline.
The kind of nuance the Reserve Bank puts on its messaging at its set-piece monetary statements is always important, but it will be even more so this time around.
It will be a question of how fast and high will rates go, given the uncertainties on the domestic and international stage.
"There are many, many moving parts so that forward guidance will be important," Steel said.
Most of the world's central banks are raising rates in an attempt to stave off inflation.
US Federal Reserve chairman Jay Powell said last week that the central bank would continue tightening monetary policy until it sees "clear and convincing" evidence that inflation is coming back down towards the central bank's 2 per cent target.
The Fed has already raised interest rates by 0.75 of a percentage point since March from near-zero levels that had been in place for roughly two years.
A series of half point rate rises over the next two months from the Fed is seen as likely.
Higher interest rates are putting downward pressure on share markets around the world.
In New Zealand's case, the S&P/NZX50 index is down by about 18 per cent from its January 2021 record high.
ANZ Bank chief economist Sharon Zollner. Photo / NZME
ANZ chief economist Sharon Zollner said that if recent weeks are anything to go by, waxing and waning US Fed hike expectations will have a huge say in local market moves.
Zollner also expects to see the Reserve Bank transition to 25-basis-point hikes at its July meeting.
The communications challenge at that point would be the switch to matching the hike with a sufficiently "hawkish" tone.
"But despite those challenges, and despite the still-large gap between the level of the OCR and the level of CPI inflation, it makes sense for multiple reasons for the Reserve Bank to soon change to a less-aggressive pace of hikes," Zollner said.
She noted that China's growth outlook has abruptly deteriorated as lockdowns and the property slowdown weighed on sentiment.
ANZ also noted the sudden fall in global dairy prices, driving both ANZ's and Fonterra's milk price forecasts lower.
"The heat is starting to come out of commodity prices more generally, as fears of a global hard landing and a US recession grow."
ASB Bank, in its preview, said clouding the monetary picture were rising recession risks, both globally and in New Zealand.
"These up the difficulty rating on the Reserve Bank's future interest rate decisions but, for now, the focus will remain squarely on the problem at hand: inflation."
