Market betting 'double-hike' in OCR to 0.75% next week more likely than no rise

Monday, 9 August 2021

Reserve Bank governor Adrian Orr will need to take a middle option so will be wrong whatever happens, BNZ suggests.

Financial markets have fully priced-in a 0.25 percentage point rise in the official cash rate next week and are betting it is more likely the Reserve Bank will instead raise the OCR by double that than leave the rate unchanged.

ASB economist Mike Jones said there was a 12 per cent chance of a 50 basis point jump, which would raise the OCR from 0.25 per cent to 0.75 per cent.

All the major banks including ASB are picking the Reserve Bank will choose to raise the OCR more gradually, in three 25bp increments to 1 per cent by the end of November.

But Jones said he doubted a 50bp lift would “surprise the economic consensus.”

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A jump in the annual inflation rate to 3.3 per cent and a plunge in the official unemployment rate to 4 per cent has set the scene for the most unpredictable, scheduled monetary policy statement in two years.

Britain is currently looking like a canary in the coal mine when it comes to global inflation; Bank of England governor Andrew Bailey explains why it lifted its inflation forecasts in August.

The traditional argument against a “double-up” hike of 50bp was that it could “spook markets and cause volatility,” Jones said.

But he said it would be worth the central bank considering the pros and cons of starting with a 50bps lift, suggesting the Reserve Bank could take inspiration from the multiple gold-medal Olympian Lisa Carrington.

“As Lisa Carrington has shown the world, a fast start can pay dividends,” he said.

BNZ research head Stephen Toplis agreed there was a “small chance” of a 50bp hike.

“There is little doubt interest rates are on the way up. It’s just a question of when and by how much,” he said.

Toplis said that whatever the Reserve Bank did it would prove to be “the wrong thing”.

A community outbreak of the Delta variant is one of the scenarios that it will be hard for the Reserve Bank to front foot.

New Zealand could experience a domestic outbreak of Covid, or variants overseas could get more “scary” undermining the case for a rate rise, he said.

Alternatively, people could adapt to “the new world” with global demand bouncing aggressively and resulting in a serious inflation problem across the planet, he said.

“And, yet, like everyone else, the Reserve Bank will have to adopt a central scenario which weaves down the middle of these options.”

Toplis said that if the Reserve Bank plotted a steady rise in rates that would have the same effect as a 50bp increase, while having the benefit of giving the bank a bit more flexibility.

“If things continue to tighten in the manner we expect, then the November meeting could get very interesting in terms of a 50 basis point increase, given the long gap between the November and February statements,” he said.

Reserve Bank governor Adrian Orr said last week that the bank’s monetary policy committee would need to think about “when and how we would return interest rates to more normal levels” and that next opportunity to do that was when it released its next monetary policy statement on Wednesday week.

But his appetite for a sharp change in direction remains subject to conjecture.

Jarden investment strategist John Carran is among those who believe expectations of fast rate rises may be getting a bit ahead of themselves.

“There is no doubt that raising the official cash rate is the right thing to do but it is just about how far and fast they go,” he said last week.

“I think they will perhaps not slam the brakes on too quickly.”