Economists expect the central bank will raise its Official Cash Rate (OCR) from 5.5% to 5.75%.
The move is expected even though Australia’s central bank has left its cash rate unchanged.
Macquarie Bank’s economists note that both New Zealand and Australia have enjoyed healthy growth in recent years, even though their trading partners have struggled.
"This partly reflects the deft handling of monetary policy by the central banks. But it would seem foolhardy to assume that the economic sunshine will continue indefinitely," Macquarie says.
The Australia central bank’s restraint provides some optimism about the growth outlook, but the New Zealand central bank seems intent on lifting rates, even though growth is expected to slow substantially, it says.
"This, of course, tilts the risk surrounding the outlook substantially, in our opinion." There are two major reasons economists think the New Zealand bank will move. Firstly, after hitting 71 US cents earlier this year, the New Zealand dollar has retreated to a little above 60 cents and isn’t looking likely to take flight again.
Secondly, recent data suggests the New Zealand economy remains stronger than expected.
"Data released over the past month has raised doubts about the extent to which domestic economic momentum is easing and, indeed, whether it is doing so at all," says ANZ Bank’s economists.
For example, employment growth accelerated in the March quarter, taking the unemployment rate to 4.3%, its lowest level in 16 years, and March quarter retail sales rose 2.8%, much greater than expected. And, of course, while the housing market is showing signs of coming off the boil, it remains very strong.
Both these factors raise the spectre of rekindled inflation. As Kate Skinner, an economist at ASB Bank, says: "A slowdown in growth is still expected later in the year but, at this stage, it looks unlikely to be as severe as was though several months ago."
Westpac’s economists note that increasing government spending and the surge in oil prices will provide further reasons for the Reserve Bank to raise rates. Westpac argues the bank should ignore higher oil prices unless it becomes clear this will cause generalised inflation and also says that economic growth could be depressed by as much as 0.5 percentage points over the next year if current oil prices are sustained.
National Bank senior economist Cameron Bagrie also notes that rising commodity prices and the strengthening global economy are yet more reasons for a rate hike.
But like Macquarie Bank, Bagrie also has an eye on the slowing Australian economy. "Given the 80% correlation between the New Zealand and Australian business cycles, the Reserve Bank should be mindful of the same occurring in New Zealand," he says.
