Bank economists are divided on when the Reserve Bank will next hike the official cash rate (OCR), and by how much, after Reserve Bank Governor Alan Bollard kept the rate at 2.5 percent today.The OCR, which dictates commercial bank lending rates, has staye
Bank economists are divided on when the Reserve Bank will next hike the official cash rate (OCR), and by how much, after Reserve Bank Governor Alan Bollard kept the rate at 2.5 percent today.
The OCR, which dictates commercial bank lending rates, has stayed at its record low 2.5 percent since April last year, following a rapid drop from 8.25 percent in July 2008.
Dr Bollard today reiterated his expectation of an increase in the rate in the middle of this year in a statement that was little changed from last month's, as the country's recovering economy kept in line with last month's projection.
The 9am announcement saw the New Zealand dollar rise slightly from US78.84 to US78.92 at 10am, before it fell again around noon.
The Reserve Bank's statement prompted Retirement Commissioner Diana Crossan to warn home owners to budget for an increase in their mortgage repayments this year, as they could see an end to the lower interest rates they have enjoyed over the past few years.
Tomorrow Dr Bollard is speaking to the Canterbury Chamber of Commerce on "The crisis and monetary policy: what we learned and where we are going" and is expected to expand further on his expectations for the economy.
ASB chief economist Nick Tuffley said a "neutral" level for the OCR would be about 5 percent, (down from an earlier estimate of 5.5 percent) and his bank expected the rate would not need to rise as rapidly as previously thought in 50 basis point increments.
"Last year the Governor implied 25 basis point hikes wouldn't cut the mustard: the speech (tomorrow) may give insights into whether the Reserve Bank has changed its mind or not. Our new view is that 25 basis point hikes will pack sufficient heat."
Mr Tuffley said smaller hikes were more likely and would have a surprisingly powerful effect on lending rates and household spending behaviour .
Mortgage rates had increased considerably over recent months, reflecting rising funding costs and that higher starting point reduced some of the necessity for 50 basis point moves.
"The mini-fire in the housing market is possibly starting to die out on its own accord, reducing the urgency for strong policy action from the Reserve Bank. We expect that supply and demand to become more balanced over the next year."
The ASB expected the Reserve Bank to start removing the stimulus in April.
Deutsche Bank's Darren Gibbs believed that the first hike in the OCR would come in April -- most likely a 50 basis point increase -- but that the risks around this start date remained skewed heavily to a slightly later start at the subsequent review on June 10.
An April hike would hinge on the domestic data.
"Our current judgement is that this data will be sufficiently robust to encourage the Reserve Bank to begin raising the OCR at the April 29 meeting with the first hike likely to be a 50 basis points increase.
"However, that hike could fairly readily slip into the following meeting on 10 June if there is any ambiguity in the data."
ANZ senior markets economist Khoon Goh said there was a subtle shift in the bank's view of inflation, which is now expected to track "comfortably" within the (1-3 percent) band, as opposed to merely "within".
A rate hike was likely in June, he said.
ANZ agreed with the Reserve Bank's assessment on that "sustained growth throughout our trading partners is not assured" and domestically household spending was cautious and business spending was weak.
The Reserve Bank's inflation outlook had altered slightly, to now "expected to track comfortably" within the band, he said.
"This appears to suggest 25 basis points moves as opposed to something larger. This has us thinking, but we'd prefer to maintain our bias for a 50 basis point move at the start of the cycle," Mr Goh said.
