by Jenny Ruth
Just about everybody expects the Reserve Bank to raise interest rates on Wednesday for a third time this year. The only argument is over whether the official cash rate (OCR) will rise from 5.25% to 5.5% or to 5.75%.
A Reuters poll conducted on Friday found five of 14 economists surveyed are expecting a 50 basis point rise while the other nine are picking 25 points. The OCR began this year at 4.75% and the last two increases were 25 points each.
Wednesday’s monetary policy statement will be the first released by acting Reserve Bank governor Rod Carr following Don Brash’s surprise resignation last month, but nobody expects Carr to be any more dovish than Brash.
WestpacTrust economist Nick Tuffley is one of the 25 points people, but he says there’s a high risk of it being 50 points.
"The Reserve Bank could quite easily use the recent strong employment and retail sales growth to justify a 50 basis point rise," Tuffley says. A 1.3% surge in employment in the March quarter took the unemployment rate to 5.3% while the proportion of adults participating in the labour market rose to a record 66.9%. Retail sales rose 2.2% in the March quarter, although sales in the month of March fell 0.8% against market expectations of a flat result.
Deutsche Bank chief economist Ulf Schoefisch, who is picking a 25 point OCR rise, says the March decline and weakness in recent consumer confidence polls suggests domestic consumption is coming off the boil.
"That trend is not surprising, considering recent increases in interest rates and a marked deterioration in the outlook for farm incomes. Furthermore, while employment growth has been robust, the upward trend in wage inflation seems to have stalled," Schoefisch says.
But Bank of New Zealand economists, who are picking a 50 point OCR rise, says the March fall in retail sales should be downplayed because Easter fell in March this year rather than in April. The last time Easter fell in March in 1997, retail sales sank 3.5%, only to bounce back 6.8% in April.
ANZ Bank economists changed their view from a 25 point to a 50 point OCR rise, saying together with the retail sales and employment figures, a 1.8% rebound in exports in the March quarter suggest the economy may have grown as much as 1.5% in those three months. That would take annual growth above 4%.
"Growth at these levels is likely to be seen as running even further in excess of New Zealand’s potential non-inflationary growth rate" than the Reserve Bank was expecting in March, ANZ argues.
Pricing in the wholesale interest rate markets suggests that even if the Reserve Bank restrains itself to a 25 point move this week, it will raise the OCR another 25 points when it reviews it in July.
The 90-day bank bills, the key rate affected by OCR moves and from which floating mortgages are priced, ended last week at 5.85%. Peter Cavanaugh, associate director at Bancorp Treasury Services, says the market is taking a two-way bet on how big this week’s move will be.
"We’re on the upward path, we just don’t know how big are the steps,’’ he says, pointing out that 180-day bank bills are trading at 6.16%, suggesting there will be more to come in any case.
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