The OCR, which directly influences bank’s floating mortgage rates, is currently at 5.75% and the RBNZ is expected to raise it to 6%.
"Everybody’s picking a rate hike and the market is fully pricing in a hike," Deutsche Bank senior economist Darren Gibbs says.
In the wholesale market on Friday, the 90-day bank bills were trading at 6.28%. The rule of thumb is that floating mortgage rates are usually about two percentage points higher.
Since the Reserve Bank released its previous monetary policy statement "all the data that matters has been stronger than expected," Gibbs says. That was particularly true of the growth figures which showed the economy grew 2.3% in the March quarter, bringing annual growth to 5%. Economists had expected the quarter’s growth had been about 1.5%.
"It’s hard to see the bank being less hawkish than it was in June," Gibbs says.
Macquarie Bank suggests that the sharp acceleration in annual inflation from 1.5% in the year ended March to 2.4% in the year ended June may unnerve the Reserve Bank sufficiently that it raises the OCR 50 basis points to 6.25% on Thursday.
ASB Bank economist Kate Skinner says there are no signs that inflation pressures will be alleviated in the short-term. "Inflation is already forecast to be above 3% throughout 2005. Therefore, the Reserve Bank has little headroom to absorb any additional inflation pressure," she says. The central bank is pledged to maintain inflation between zero and 3% over the medium term.
Skinner expects there’s a greater than even chance of further rate hikes the next two times the Reserve Bank reviews the OCR, bringing the benchmark rate to 6.5%.
Bank of New Zealand’s economists don’t think the central bank will be quite as hawkish, picking that the OCR will peak at 6.25% in September. They says that any pause in raising rates now might give the housing market a second wind, an outcome the Reserve Bank wouldn’t want.
Westpac economists say the main reason for any hesitation in raising rates is that the New Zealand dollar has been slightly higher than the Reserve Bank expected, but that will be insufficient to stay its hand.
