OCR preview: ‘On a knife-edge’: Interest rate to rise, with prospect of more to come

Economists expect the Reserve Bank of New Zealand (RBNZ) to lift the Official Cash Rate this Wednesday and highlight the risk of more to come.

The big turn in immigration numbers and last week’s Budget have shifted forecasts drastically since the last OCR decision in April.

Where previously, a rate hike to 5.5 per cent this month was expected to be the peak for the cycle, there are growing expectations we’ll see the rate move as high as 6 per cent.

ASB now expects another 50-basis-point hike this week as the RBNZ looks to get on top of inflation and an economy that won’t slow down.

“The impending RBNZ Monetary Policy Statement now looks more on a knife-edge,” said ASB chief economist Nick Tuffley.

“We had previously thought that the RBNZ would do a final 25bp increase on May 24. Post-Budget, we now expect a 50bp lift in May.”

“We think that will be it, but that the RBNZ will flag the risk of a further hike,” he said.

“There is an evident turning in inflation pressure and lagged monetary policy impacts that are yet to come through. But there are two added flies in the inflation ointment: fiscal pressures and the uncertain inflation impact of migration.”

Prior to last week’s Budget, Westpac chief economist Kelly Eckhold had already upped his peak rate expectation to 6 per cent, largely based on that dramatic surge in migration.

Last week, Treasury revised its forecasts to have New Zealand avoiding recession on the basis of a net migration gain of 66,000.

But if the migrants keep arriving at the current rate, that estimate may prove conservative.

“New Zealand’s strong labour market is continuing to attract more people to our shores,” Eckhold said.

“In fact, we expect that net migration will rise to an annual inflow of 100,000 people by the end of this year,” he said.

That sharp rise in net migration will see population growth rise from just 0.5 per cent at the end of 2022 to 2.4 per cent by the close of this year.

That would be the fastest rate of population growth New Zealand had seen in decades, and it signals a large increase in many businesses’ demand base, he said.

Both BNZ and ANZ economists have shifted their expectations to a peak of 5.75 per cent, although they see a 25-basis-point hike this week and another in June as more likely.

BNZ head of research Stephen Toplis had been less convinced by the inflationary impact of immigration, but says: “The Budget is the straw that broke the camel’s back in terms of our view on the cash rate.”

“On balance, we believe the Budget will add to inflationary pressure at the margin,” he said.

“We now believe that, in addition to the 25 basis points we expect the RBNZ to deliver next week, it will go a further 25 in July, taking the peak to 5.75 per cent.”

Toplis argues that no further rate increases will be necessary, but “given the Reserve Bank’s recent display of inflationary fear, it’s hard to see how it won’t be bothered by the burgeoning funding requirement of the Government”.

Even Kiwibank, thus far the most dovish in its inflation outlook, now sees a hike this week as a certainty.

“Next week’s 25bp rate hike is in itself the least interesting part of the decision,” said Kiwibank chief economist Jarrod Kerr.

“It’s all about the forward guidance. And we will all ask the same question: is 5.5 per cent the peak in this cycle? It should be. And we still believe it will be. But it’s too early for the RBNZ to come to that conclusion (unfortunately).”

The Reserve Bank will release its full Monetary Policy Statement at 2pm on Wednesday. Visit nzherald.co.nz for news and full analysis.