Official cash rate expected to rise to 3.5% on Wednesday

Friday, 30 September 2022

Reserve Bank governor Adrian Orr speaks with Stuff a day after raising the official cash rate in August. (Video first published August 18, 2022)

Economists are in agreement that the Reserve Bank will hike the official cash rate by a further 50 basis points to 3.5% when it reviews its monetary policy on Wednesday.

That is despite some “dovish” comments by Reserve Bank governor Adrian Orr in recent days.

The published forecasts in bank’s last monetary policy statement in August appeared to keep either a ‘double hike’ or a smaller 25 basis-point rise in play at this week’s review.

At a meeting hosted by the Council of Trade Unions on Tuesday, Orr described the bank’s cycle of monetary policy tightening as “well advanced” and “very mature”.

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Reserve Bank governor Adrian Orr has described its current tightening cycle as well-advanced and very mature.

* When low unemployment becomes a problem for the economy

But all the country’s major banks are forecasting the Reserve Bank will raise the OCR by 50 basis points both on Wednesday and when it issues its last monetary statement for the year in November.

ANZ described a 50-basis point rise this week as “locked and loaded”.

The review comes at a time when pressures on the Reserve Bank are starting to conflict.

Fears of a global recession are on the rise, but interest rate hikes by the US Federal Reserve have put pressure on the New Zealand dollar and other smaller currencies, threatening to increase imported inflation here and elsewhere.

ANZ chief economist Sharon Zollner said on Friday that countries were going to have “a nasty choice of raising their rates to sort of keep up with the US Federal Reserve or watch their exchange rates fall through the floor and inflation rise very rapidly”.

Westpac said “recent developments” pointed to the risk of stronger and more persistent inflation pressures than it had previously anticipated.

“In particular, we now expect the New Zealand dollar to be lower for longer, adding to the pace of inflation in the year ahead,” it said.

“In an already-overheated economy – which is proving to be more resilient in the near term than we thought – the risks of second-round inflation pressures are greater.”

BNZ research head Stephen Toplis said the main point of interest on Wednesday would be whether the Reserve Bank provided “any hint of evolution in its view as to where interest rates might go in 2023”.

He and ASB expect the OCR to peak at 4.25%, which would be broadly consistent with Reserve Bank forecasts published in August.

But financial markets are pricing in a higher peak of about 4.5% and ANZ expects the rate will climb to 4.75% before falling.

Toplis is among a group of economists voicing concerns that central banks might end up over-cooking interest rate rises in the face of a worsening economic outlook.

“The hawkish scenario is the currency drives inflation higher than anticipated for longer, but the downside is a crippled global economy,” he said in a research note last week.

“We can’t stress enough our fear that the rapidity of rate increases globally, coupled with the disastrous consequences of Europe/UK’s energy crisis, means things could well and truly turn to custard.”

Independent economist Cameron Bagrie said that despite Orr’s comment that its current tightening cycle was well-advanced and very mature, that did not mean that the impact of higher interest rates had already largely come through.

Instead, the impact on borrowers was still in the early stages, he said.

Getting inflation back down to 2% would involve “breaking some economic bones” and the trade-off that involved was “inflation versus jobs”, he said.