KEY POINTS:
The meteoric rise of the Kiwi dollar and higher mortgage interest rates may convince the Reserve Bank to forego another rate hike when it reviews its official cash rate this Thursday.
But economists see another rate hike, whether it be this week or at its next opportunity in June, as inevitable while the housing sector shows no sign of slowing and while inflation continues to cause concern.
The official cash rate is 7.50 per cent after the Reserve Bank raised it by 25 basis points on March 8, at the same time warning that a further tightening may be required.
But borrowers have already shown surprising resilience to New Zealand interest rates, which are the highest in the industrialised world, so the question remains: When will they really start to bite?
ASB Bank chief economist Nick Tuffley says we are not far off that crunch point now.
It was commonly held in 1990s that New Zealanders would only respond to hikes when rates got into double digits.
Tuffley says that rule no longer holds true because households carry much more debt these days, making them more vulnerable to rate rises than in the past.
"We are now in a situation where one and two years are at 8 or 9 per cent and five-year rates are at 8.6 per cent. You can't get a sub 8 per cent interest rate so they can't hide any longer from the monetary tightening."
ASB expects a rate hike on Thursday but Tuffley said there was a case for the Reserve Bank to hold on until June, thanks to the movement in mortgage rates and the kiwi breaking record post-float highs.
Tuffley doesn't see a risk of a big downturn once the Reserve Bank finally turns the corner on inflation, but says a change in sentiment could see the economy slow quickly.
Deutsche Bank's head of research, David Plank, thinks the Reserve Bank should increase the rate this week but says the bank will probably leave it at the current rate until June.
Bank governor Alan Bollard is reluctant to tighten because of the likely strengthening impact it would have on the dollar.
But Deutsche Bank runs a counter argument that says a more aggressive tightening stance would be more effective in taking the heat out of the economy, which in turn would have an easing effect on the dollar.
Plank's main criticism is that the bank should have acted by tightening as far back as 2002/3.
Westpac Institutional Bank chief economist Brendan O'Donovan also expects the bank to hold on until June, when it will have had time to assess the impact of higher mortgages and the stronger New Zealand dollar.
But he says the inflation "nut" is much bigger than previously thought, and will be much harder to crack. "Do not expect longer-dated interest rates or fixed-rate mortgages to fall any time soon," says O'Donovan.
