NZ Reserve Bank faces 'coin toss' decision on how far to raise official cash rate on Wednesday

Friday, 8 April 2022

Homes used to cost a lot less, but in previous decades home loan interest rates were much higher. Home loans rates are however on the rise as the Reserve Bank Te Pūtea Matua has been raising the official cash rate to fight inflation.

Economists are divided over whether the Reserve Bank will raise the official cash rate by 25 or 50 basis points when it next reviews its monetary policy on Wednesday.

As ever when a rates decision hangs in the balance, the call could have a meaningful impact on mortgage rates, as banks have been unsure how much of a rate rise to price in.

ANZ Bank and Singapore-based Capital Economics are among those tipping the central bank will hike the OCR by 50 basis points both this week and again when it issues its next monetary policy statement on May 25.

That would take the OCR to 1.5 per cent this week and to 2 per cent next month.

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But Westpac economist Michael Gordon has come down on the side of a 25bp rate rise, saying that in Westpac’s view there had been “little in the way of data or guidance that would support a change in tack to bigger rate hikes at this point”.

ASB and BNZ are also forecasting a 25bp rise this time, but both say it is “a coin toss” between that and a 50bp jump.

ANZ chief economist Sharon Zollner said that financial markets had priced in a total hike in the OCR of 126 basis points from the Reserve Bank’s next three meetings.

The actions of Reserve Bank governor Adrian Orr are likely to speak louder than words on Wednesday.

What does the official cash rate mean?

But if it only lifted interest rates by 25bp this week, markets might assume the Reserve Bank would limit itself to 25bp rate rises in the immediate future, she suggested.

That would cause expectations of higher rates to “concertina back”, resulting in some real volatility and potentially confusion, she said.

At the same time, a 25bp rise could do “some real damage” at the farther end of the yield curve as markets built in the risk of higher inflation 10 years from now and further out, Zollner said.

“We think a 50bp hike is the ‘path of least resistance’ for markets given what is priced in over the next two or three meetings.”

ASB senior economist Mark Smith noted there was a raft of economic data due to be published between the April OCR review and the May monetary policy statement that could influence the Reserve Bank's stance.

That includes first-quarter inflation and employment data, the Reserve Bank’s own “survey of expectations”, and the Budget on May 19.

BNZ is currently forecasting a 50bp rate rise in May despite sticking to a 25bp forecast for this week.

The actions of Reserve Bank governor Adrian Orr are likely to speak louder than words on Wednesday.

When there is consensus over the Reserve Bank’s next interest rate move, the focus tends to shift to the language its governor uses to describe economic conditions and the signals the bank sends over its future intent.

But the Reserve Bank is not due to update its track for future OCR movements at the review and won’t be holding a media conference, as it does when it releases full-blown monetary statements, so will instead leave its rates decision and written commentary to do the talking.