Finance Minister Grant Robertson during his Crown accounts briefing at the Treasury in Wellington. Video / Mark Mitchell
Despite delivering a 50 basis point rate hike - as expected - the RBNZ's strong statement today has economists convinced the Official Cash Rate is headed for a peak well above its previously forecast 4 per cent.
That would push mortgage rates higher and put more recessionary pressure on thelocal economy, economists said.
This week local banks revealed they are now stress-testing new borrowers' ability to pay mortgages at rates of up to 8 per cent.
In terms of mortgage rate implications floating loans might see increases over the next day or two, but there might not be much change in fixed rates as a direct result of this increase, said CoreLogic NZ chief property economist Kelvin Davidson.
"Even so, the past few weeks have been a timely reminder that global uncertainty and the inflation outlook are far from settled – meaning that mortgage rates may not have peaked yet, especially if the Reserve Bank needs to keep the OCR rising beyond 4 per cent next year."
While the main RBNZ statement did not discuss the likely extent of future interest rate rises, the record of the meeting was "unusually explicit" in noting that the Committee debated between a 50 or a 75 basis point hike, said Westpac chief economist Michael Gordon.
Without making any firm commitments or new forecasts, the statement signalled that the RBNZ was leaning toward a more hawkish stance.
On the rise: Reserve Bank Governor Adrian Orr lifted the Official Cash Rate by another 50 basis points. Photo / Mark Mitchell
The wording was a clever piece of messaging which succeeded in pushing the kiwi dollar higher - albeit briefly.
"Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required," the Monetary Policy Committee said in its statement.
"Other members emphasised the degree of policy tightening delivered to date. Members also noted the lags in monetary policy transmission and a slow pass-through to retail interest rates. On balance, the Committee agreed that a 50 basis point increase was appropriate at this meeting."
The RBNZ is already lifting rates at the fastest pace on record. It has hiked the OCR eight times in a row, including five 50-basis point hikes.
That has taken it from a record low of 0.25 per cent to 3.5 per cent in just 12 months.
But the recent currency market turmoil, with US dollar strength pushing down the value of the kiwi, is making the domestic inflation fight harder.
The Committee noted the recent fall in the kiwi dollar.
"Higher global interest rates and increased risk aversion in global markets have placed downward pressure on the New Zealand dollar," it said.
"However, a lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon."
Both the market and most bank economists now forecast the OCR will peak between 4.25 and 4.75 per cent.
The RBNZ won't deliver a new OCR forecast until the November Monetary Policy Statement - by which time fresh Consumer Price index data will have provided a clearer picture of whether inflation has peaked.
ASB chief economist Nick Tuffley said the tone of the latest statement confirmed his view that there was another 50 basis point hike coming in November.
Marcel Thieliant at Capital Economics noted that "in contrast to July, where the Bank noted that its outlook for the OCR was consistent with the forecast presented in the April Monetary Policy Statement, there was no such line in the latest statement.
Capital Economics is now forecasting a peak OCR of 4.5 per cent.
At BNZ, head of research Stephen Toplis described the messaging as "subtle."
"At the very margin, today's Monetary Policy Review seemed to give a subtle nod to the possibility the RBNZ might have to do more than it suggested when it produced its August Monetary Policy Statement," he said.
"Nonetheless, the key message was that the Bank thinks it has things broadly under control and sees little reason to deviate substantively from its previously stated course of action.
