OCR hike tipped for next week

Reserve Bank governor Allan Bollard. Photo / Mark Mitchell

The Reserve Bank is tipped to raise the Official Cash Rate next week, despite lower than expected economic growth.

Westpac economists expect Reserve Bank governor Alan Bollard will hike the rate by 25 basis points to 3 per cent at next Thursday's meeting, but with a slightly more subdued statement than at the last meeting.

Bollard increased the Official Cash Rate for the first time in nearly two years in June and expectations at that time were that further rises would follow.

"Recent economic data has been on the soft side of expectations, but not enough to divert the RBNZ from its stated intention to normalise interest rates over the next couple of years," Westpac's OCR preview says.

ASB chief economist Nick Tuffley and economist Christina Leung also expect the Reserve Bank will continue to increase the OCR in 25 basis point increments in the coming year.

GDP grew by 0.6 per cent, against forecasts of 0.8 per cent during the March quarter and indications are that June quarter results will also fall short of the bank's previous forecast of 1.1 per cent, Westpac says.

June quarter CPI was also lower than expected and food prices have fallen, the report says.

However housing-related costs have increased, and the export sector continues to benefit from high commodity prices and demand.

"All together the data points to a continued rebalancing of the economy with the contrast between weak consumption and strong production even greater than thought."

Next week's statement was likely to be peppered with reference to flat or weaker economic conditions compared to June.

However the crucial message from the market's point of view, would be left largely intact, the report says.

In June that paragraph read: "Given this outlook and as previously signalled, we have decided to begin removing some of the monetary policy stimulus that is currently in place."

The following paragraph: "the further removal of stimulus will be reviewed in light of economic and financial market developments," implied that people should not automatically assume another hike in seven weeks, even if a follow-up hike was more likely than not, Westpac says.

It is expected the cash rate will rise from a low of 2.5 per cent to a more neutral level of 5.5 per cent to 6 per cent over the next two years.

"The RBNZ has spent many months making the case that interest rates will need to be normalised as the economy improves.

"There is nothing in the recent data that would warrant a change to the end-point of that plan, though it perhaps argues for less front-loading of hikes," the report says.

- NZ HERALD STAFF