Official cash rate expected to rise by 25 basis points on Wednesday

Tuesday, 5 October 2021

Reserve Bank governor Adrian Orr is unlikely to surprise on Wednesday.

ANALYSIS: The Reserve Bank is expected to raise the official cash rate to 0.5 per cent when it releases its review of monetary policy at 2pm on Wednesday, despite the country entering new Covid territory.

Governor Adrian Orr made clear after the central bank released its last monetary policy statement on August 18 that the bank had only held off raising the OCR that day due to the confirmation of the Delta outbreak the day before.

At the time, the expectation was that the outbreak had been caught early and was likely to be brought under control.

Finance Minister Grant Robertson told 1300 businesses on a webinar on August 20 that he was confident a very long extended lockdown' would not be needed and that “a level 4 approach” would be able to contain the outbreak.

* Expected October interest rate hike may not fully flow to mortgages until April

* Adrian Orr: Decision to hold official cash rate 'literally down to the uncertainty of the day'

Economists Brad Olsen and Gareth Kiernan join Stuff’s Business Editor Susan Edmunds to discuss the state of the economy and answer readers’ questions.

But even though the Delta outbreak hasn’t played out to that script, bank economists are still strongly tipping a rate rise.

Orr said in August that it was not clear what would deviate the Reserve Bank from its “main path” of wanting to reduce stimulus.

“Even with Delta that still remains the obvious path for us, subject to hearing otherwise,” he said then.

Assistant governor Christian Hawkesby sent a strong signal late last month that a ‘double hike’ of 50 basis points to 0.75 per cent wouldn’t be on the table, saying monetary policy required an approach that was “adaptable, sometimes moving with caution in slow, small steps”.

A 25bp rate rise would come with businesses’ collective psyche arguably in an even more fragile state than it was when the Reserve Bank delayed in August.

But strong labour market conditions and inflation data overseas would appear to make a retreat from the Reserve Bank’s previously-stated intentions problematic.

Seek said the number of job vacancies it was advertising climbed 0.3 per cent in September, despite ongoing Covid restrictions.

Trade Me Jobs, which has a higher proportion of its listings in the ‘blue collar’ trades, said it saw the jobs market go from “strength to strength” in the third quarter with its job listings also up and “the largest annual percentage jump in salaries on record”.

ASB last week described a 25 basis point rise in the OCR as “very likely”, with the latest pre-lockdown data confirming the economy maintained significant momentum heading into lockdown and business survey data appearing resilient.

ANZ chief economist Sharon Zollner also voiced “relatively high conviction” around a 25bp rise.

BNZ research head Stephen Toplis was a little more guarded, putting out the chances of a rate rise at 85 per cent.

“Lest it not be forgotten that it is people who make the decisions not machines,” he said.

“These people will be being emotionally torn by recent Covid developments in the same way that everyone else is in the country.”

Westpac economist Michael Gordon said there was “a clear case” for a rate rise even if the future track of the OCR after that looked less certain than in August, while Kiwibank said a hike was almost certain.