With only the March quarter inflation data to come, most economists expect the Reserve Bank will raise its official cash rate (OCR) from 5% to 5.25% on Wednesday.
A Reuters poll earlier this month found 10 of 11 forecasters were picking a 25 basis point rise this week. Increasingly, they are also seeing a further 50 basis point increase to 5.75% in May as likely.
The inflation figures will be released on Tuesday and economists are expecting a rise between 0.6% and 1.1% for the quarter. That will bring annual inflation to between 2.6% and 3.1%. If the higher end of expectations is met, the figure will breach the Reserve Bank’s zero to 3% target.
"Any chance that the Reserve Bank might stay its hand until the May monetary policy statement has effectively been dashed by the release of several strong pieces of data over the past week," says ANZ Bank. "It could even be argued that the strength of the data was sufficient to cause (Reserve Bank governor Don) Brash to seriously consider increasing rates by 50 basis points (this week)", it says.
The data includes a 1.8% jump in retail sales in February compared with market expectations of just 0.3% and business confidence remains strong.
Even if the inflation figures come in below expectations, that won’t necessarily stay Brash’s hand, says WestpacTrust.
"More recent news suggests the second quarter will be the main inflation pulse."
It is expecting inflation of 1% in the June quarter compared with the Reserve Bank’s 0.7% forecast.
Deutsche Bank says that as well as the economy being more buoyant than Brash envisaged last month when he raised the OCR, inflation pressures are also growing.
Senior economist Darren Gibbs says even though global growth sentiment, a key consideration when Brash was cutting the OCR last year, has come off the boil, "we cannot see how the bank could justify refraining from following the tightening cycle that it signalled so clearly" in March.
He notes the wholesale market is currently fully pricing in a 25 point rise this week and a 50 point rise in May. The 90-day bank bill rate, from which the banks fund their floating mortgages, was trading at 5.71% late Friday.
A few days after last month’s OCR rise, the five major home lending banks raised their floating rates from 6.7% to 7.2%. The 90-day bank bills were then trading about 5.55% and the banks were playing catchup on the 70 basis point rise since December.
