“However, strong growth and inflation numbers in the next few months, combined with a possible hawkish approach from the new Reserve Bank governor, could force interest rate rises back on the table as soon as May.”
He said the reason May was the first possibility was that February was too early.
“But if you had a continued string of hot data, and I’m not saying that will necessarily happen, it’s not the current forecast, but if it did, conceivably the first time that the Reserve Bank would have enough information to make such a strong call would be in the May monetary policy statement.”
He said there was already movement in markets that could help to do some of the Reserve Bank’s job.
“The signal’s quite clear on the table, that interest rates are likely to have to increase faster than people previously expected.
“I still don’t think we’re yet in a position to go, we have to pull the trigger immediately, because I think there’s a little bit of danger in responding and reacting to every single individual number … It’s more that, because we keep getting asked this question, we’re just wanting to provide a little bit of that context around what possible moves could there be in the system, but it’s certainly not the central view at the moment.”
He said Infometrics had warned last year that when the OCR went below 3% there was a risk it was the wrong move.
“Those interest rate cuts aren’t going to hit the economy until later this year. And so you could well find yourself having a slightly hotter economic activity, given that you’ve seen a few indicators pop a bit higher in recent times, and slightly hotter inflation, and then you get some further interest rate cuts that continue to fall into the economy. That could be a potent cocktail.
“But yeah, put it this way, we signalled that risk quite clearly last year. And like I say, we’re not there yet. But those numbers on Friday and more of the breadth of pressure did start to worry us a bit.”
He said data showed that inflation on essentials was running at about 3.8% a year, above the long-term average of about 3.2%.
“The likes of discretionary items are currently running at 1.8% per annum, up a bit over the last couple of quarters, but in line with the long term average of also 1.8%. Long story short, it is those essential costs that are hitting households a lot harder.”
He said it could make sense for people who were borrowing to be aware of what was happening and potentially spread their risk more than normal.
Kiwibank economists said they still did not think an increase was needed until next year.
