Reserve Bank tipped to make cash rate history

Predictions for 75-point rise but where rate will peak uncertain

The Reserve Bank is expected to deliver an unprecedented 75 basis point hike on Wednesday, taking the official cash rate from 3.5 per cent to 4.25 per cent, economists say.

A softer 50 basis point hike is still a possibility, but regardless it will take the cash rate to its highest level in 14 years — just prior to the Global Financial Crisis.

But while high inflation and risks of a domestic wage-price spiral make another big hike a relatively easy call for the Reserve Bank (RBNZ), the longer-term forecasts for where the rate will peak aren’t so simple.

Market pricing currently implied a peak OCR of around 5.1 per cent, ASB chief economist Nick Tuffley said.

Although expectations for interest peaks had softened globally in the wake of lower-than-forecast United States inflation data earlier this month. the domestic situation would still see the RBNZ forecasting “a greater degree of inflation pressure that needs to be leaned against harder”, he said.

Compared to the August MPS, the forecasts were likely to show a slightly higher near-term growth outlook, tighter labour markets with more persistent wage pressure and a similar or slightly lower exchange rate outlook, he said.

Tuffley is picking the RBNZ will lift its forecast peak (or terminal rate) from 4.1 per cent in August to around 5 per cent.

BNZ head of research Stephen Toplis also sees a 75 basis point hike as most likely but makes a strong case for a more cautious 50 basis points.

“It would seem reasonable to assume the RBNZ would want to throw the book at inflation by raising interest rates 75 basis points at this meeting and intimating much more to come,” he said.

“The likelihood of this is bolstered by the fact it would appear more than one Monetary Policy Committee member was keen to hike rates 75 basis points at the October meeting.”

But Toplis lists several points — including lower commodity prices, slowing construction and gloomy consumer confidence — that point to a marked economic slowdown.

“Does the Reserve Bank really want to accelerate the tightening cycle this late in the piece?” he said.

“Recall that the Governor has said that we are now most of the way there in terms of tightening.

“A 75 basis points move would not really be consistent with that thinking. Cognisant of the lags between raising interest rates and the economic impact thereof, if we were the central bank we would raise interest rates 50 basis points at the upcoming meeting, take the time between now and the next meeting in February to reassess.”

But Toplis is a bit of an outlier in picking an economic slowdown or recession will arrive to head off rate hikes below a 5 per cent peak.

Others, such as ANZ’S Sharon Zollner, expect nothing less than a hawkish performance from Governor Adrian Orr.

“Local data since the August MPS (and particularly since the October Review, when the RBNZ said it considered a 75bp hike) has been firmly on the hawkish side of expectations,” she said.

“The RBNZ has already proven that it’s not in the least afraid to go its own way, and the global tilt towards slower hikes is unlikely to play a significant part in the decision.”

ANZ is forecasting the OCR to peak at 5 per cent, via another 75bp hike in February on a “let’s just get it done” basis.

“If data cools more rapidly than expected the RBNZ could well slow the pace at that point. But regardless, we see upside risk to our forecast of a peak 5 per cent OCR, given what’s looking like a well-entrenched wage-price spiral at this point.”

Kiwibank chief economist Jarrod Kerr noted the effects of central bank tightening were now being felt around the world.

“Global growth is slowing, and we may have seen the peak in inflation, here and abroad,” he said.

“Kiwi households are feeling the pain, now, as they roll off exceptionally lowinterest rates. The substantial increase in interest expense comes at a time of ‘crisis’ for living costs and falling house prices.”

But he doesn’t expect to see an RBNZ “pivot” until February.

Since the RBNZ’S last decision in October, inflation and expectations of inflation have surprised on the upside, he said.

“According to the expectations survey, inflation will not return to the 1-to-3 per cent target band for 3 to 4 years and a comfortable return to 2 per cent is a decade away.”

That rise in inflation expectations would be unacceptable for RBNZ officials, he said.

Westpac chief economist Michael Gordon rounds out the full set of bank economists picking a 75 basis point hike.

“The Reserve Bank finds itself facing the real risk of an inflationary spiral — the very situation it had hoped to prevent with its relatively early start on hiking interest rates.

“But given the momentum in domestic demand, and the cautious initial pace of rate hikes, the economy has become increasingly overheated and the advantage appears to have been lost.

“While we’re picking a 75 basis point increase next week, we acknowledge that both a 50-point and a 100-point increase are genuine possibilities as well,” he said.