Official cash rate set to increase

It’s likely the official cash rate will increase again today but commentators say that the impact on interest rates may not be significant.

The rate is currently at 2% but economists predict that it is likely to increase to 2.5% in the July update, as the Reserve Bank works to dampen inflation.

The bank predicts the rate will peak at 4%, though some economists expect it will not need to get so high. It will not update its forecasts this time – that will need to wait for the next monetary policy statement. This week’s is only a monetary policy review.

Interest rates have risen sharply in recent months although several banks have cut their two-year rates in recent weeks, because of a reduction in the cost of wholesale funding.

Infometrics chief forecaster Gareth Kiernan said, if the Reserve Bank was to increase the cash rate by 50 basis points, it would be unlikely to cause a significant market reaction, given the limited insight offered by the

Reserve Bank with its reviews.

‘‘It’s not out of the question, though. In theory, they could heavily emphasise the risks of a recession, with the implication that the OCR might not need to go up to 4% as they predicted in their most recent forecasts,’’ he said. ‘‘Alternatively, they could also point to the mass of inflationary pressures still showing through in last week’s Quarterly Survey of Business Opinion as an indicator they might have to keep tightening further and faster.

‘‘At this stage, our pick is still for another 40 to 50 basis points of increase in the one-year mortgage rate from current levels to a peak of about 5.6% in the first half of next year.’’

A rate of 5.19%, currently on offer from Kiwibank for one-year on a $500,000 loan would have weekly payments of $1374 a fortnight over 25 years. If the rate lifted to 5.6% it would be $1430.

At ANZ, economist Miles Workman said the widespread expectation, including from economists, analysts and the market, was that the rate would increase to 2.5%.

‘‘Markets also have this outcome fully priced in. So provided the Reserve Bank actually go 50, as unanimously expected, the focus for markets is going to be on the Reserve Bank’s language and any signal from them in terms of how they are thinking about recent economic developments, and what these mean for the OCR going forward.

‘‘On that score, we expect the Reserve Bank will strike a similar tone to the May MPS: inflation is way too high and the OCR needs to go higher to rectify that. Yes, there may be a few wobbles developing in the economic data, but inflation indicators haven’t let up at all.’’