Reserve Bank: to bark or bite?
Financial markets were betting there was a 24% chance of the Reserve Bank hiking the official cash rate to 5.75% on the eve of what ASB was describing as “one of the most contentious” monetary policy statements for a while.
The Reserve Bank will announce its decision at 2pm today, with Kiwibank chief economist Jarrod Kerr having previously said it was on the edge of its seat.
The estimate that the chance of a hike is just under one-in-four is based on the price that traders were paying for debt yesterday morning.
ASB senior economist Kim Mundy said that was a “bit of a pull-back” from a few weeks ago when traders were viewing a rate-rise as more “50:50”, suggesting those expecting a rise had lost a little bit of conviction.
ANZ chief economist Sharon Zollner has forecast the central bank will raise the official cash rate (OCR) by 25 basis points both today and in May, which if correct would take the key interest rate to 6%.
But most other forecasters believe it is more likely the Reserve Bank will leave the OCR at 5.5% while attempting to sound hawkish and continuing to voice concern over the pace at which inflation expectations are retreating.
Mundy said there had been little fresh data this week to sway last-minute expectations. Whether mortgage rates might fall in the event that the Reserve Bank did leave rates on hold might depend on the tone of its statement, she said.
“We still expect it's going to be a very hawkish statement, focused on the risk that rates could go higher.”
There has been some speculation the Reserve Bank might not reach a consensus and that its decision might go to a vote for only the second-time ever.
That could have an impact on how financial markets viewed the monetary policy statement, Mundy said.
“A decision not to change the OCR by unanimous vote would clearly be less hawkish than one in which there is dissent.”
Westpac said it believed the Reserve Bank’s goal would be to leave the OCR at 5.5% while at the same time trying to dissuade banks from building a higher chance of rate cuts this year back into their forecasts.
To that end, it was likely to leave a rate rise on the table for its next full monetary policy statement in May, it predicted.