The Reserve Bank should consider a double-hike next week, lifting the official cash rate by 50 basis points to get ahead of inflation pressures in the economy, says ASB senior economist Mike Jones.
Most economists now expect the Reserve Bank will raise the rate by 25 basis points next Wednesday (August 18), following data in the past few weeks which showed annual inflation running at 3.3 per cent and unemployment now down to 4 per cent.
"It would also be worth the RBNZ considering the pros and cons of starting with a 50bps lift," Jones said in a new report out today.
The OCR is currently sitting at a record low of 0.25 per cent,
"The traditional argument against is that a double-up can spook markets and cause volatility. But markets are already pricing a 12 per cent chance of a 50bps raise, and we doubt a 50bp lift would surprise the economic consensus," Jones said.
While ASB has retained its forecast for a 25bps hike, Jones cited the Reserve Bank's strategy for following "the path of least regrets" as a reason for considering a double hike.
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"The least regrets idea has had a big influence on policy setting during the Covid era. If in doubt, throw the kitchen sink at it, because things look awful," he said.
"But things have changed. The path of 'least regret' has flipped 180 degrees to the RBNZ not reducing stimulus fast enough. The bank confirmed as much in July. This is important in framing the risks around policymaking over the remainder of the year".
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Advertise with NZME.While there was still debate about the permanence of the upcoming spike in headline inflation, core inflation was likely to remain above 2 per cent, he said.
Meanwhile, 4 per cent unemployment was looking likely and wage growth was expected to accelerate further.
In the past few weeks some commentators, including the Herald's Brian Fallow, have run a counter-view that the RBNZ should keep rates on hold while the risk of further Covid outbreaks and lockdowns remains.
"Yes, there are risks from the spreading Delta variant," Jones said.
"The Australian outbreak is too close for comfort. But the clear and present danger is that the economy continues to overheat, allowing inflation to get away. If things change down the track (*touch wood*), the RBNZ can always back off, just like we saw from the Reserve Bank of Australia last week".
The other reason to get a fast start on rate increases was housing, he said.
"We never bought into the dire predictions for house prices we saw in the wake of the Government's tax changes."
Annual house price inflation was still stronger than the Reserve Bank had hoped.
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Advertise with NZME."The RBNZ is frustrated with continued 'risky lending' and is going back to the macroprudential tool-shed to find a bigger hammer," he said.
"Using interest rates to douse the housing market is cleaner and potentially less distortionary. Making a fast start with interest rates – whether it's three 25bps hikes in a row or an initial 50bps – might avoid having to play catch up down the line".
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Meanwhile, BNZ head of research has Stephen Toplis also published a monetary policy statement preview today, reiterating his expectation that the OCR will be hiked by 25 basis points.
But Toplis highlights the thankless task the central bank faces.
"No matter what the RBNZ does it will inevitably be the wrong thing," he says.
"Not because the RBNZ is incompetent but because getting it right would require an accurate forecast of Covid's progression, and economic impact, both here and offshore".
"This is simply not feasible".
One of three outcomes was likely:
• "We get a domestic outbreak of Covid sufficient to undermine demand and the need to raise interest rates or, at least, postpone any increase".
• "Covid variants get more and more scary and impede activity globally".
• "People just adapt to the new world, demand bounces aggressively, globally, while supply constraints remain elevated, resulting in a serious inflation problem
across the planet."
Like everyone else, the RBNZ would have to "adapt a central scenario which weaves down the middle of these options".
"In short, then, time will either show the Bank to have been too aggressive or not aggressive enough," Toplis said.
"That's the pleasure of being a central banker in times of excess confusion".
