NZ's Reserve Bank may hint at a path to normality at OCR review

Reserve Bank Governor Adrian Orr. Photo / NZ Herald

Economists expect the Reserve Bank to start dropping hints about the likely path to normality when it releases its monetary policy report on Wednesday.

The central bank is expected to keep its official cash rate (OCR) unchanged at its historical low of 0.25 per cent.

But last week's stronger-than-expected Quarterly Survey of Business Opinion (QSBO) has prompted the big four commercial banks to bring forward their rate hike expectations from early 2022 to November this year.

ANZ chief economist Sharon Zollner said she expected the Reserve Bank to acknowledge the stronger starting point - the tighter labour market - and rising inflation risks, thereby setting the scene for kicking off the hiking cycle this year.

"We have been emphasising for some time that the risks were becoming strongly skewed towards lift-off this year," she said.

"Now that the market is there, it's more likely," she said in a commentary.

ANZ expects the Reserve Bank to start hiking in November, lifting the OCR in steady steps to 1.75 per cent by February 2023.

ASB Bank said the QSBO report confirmed extreme labour market capacity pressures, suggesting a strong lift in wage inflation was on the cards.

"Stronger wage growth coupled with generalised CPI increases are a risky mix for the RBNZ, we expect the RBNZ to start normalising the official cash rate from November this year," ASB said.

"The labour market is exceptionally tight, showing signs the labour market will return to the frothiness of 2005-2006.

"Difficulty finding labour is at record highs and we expect that wage inflation will soon lift strongly," ASB said.

"It is very clear that record amounts of monetary stimulus are no longer needed to support the economy," the bank said.

Westpac senior economist Michael Gordon said the cost pressures resulting from Covid-19 disruptions were well known.

"The more significant development for the Reserve Bank is the growing evidence that demand is running hot," he said.

Strong demand increases the risk that supply- related price shocks can become more
enduring, he said.

Gordon expected the Reserve Bank's report to start setting the scene for a normalisation of monetary policy, without committing to a particular timing at this stage.

Interest rates aside, the Reserve Bank may opt to further wind back its Government-bond-buying activities.

As it stands, the Reserve Bank - through its large scale asset-buying programme - is buying $200 million worth of Government bonds a week, down from $1.8 billion near the start of the Covid-19 pandemic early last year.

The programme is aimed at keeping interest rates low so as to encourge an economic recovery from Covid-19 and the Government-ordered lockdowns associated with it.