Mortgage holders and business borrowers can expect up to
eight more official cash rate rises by the Reserve Bank by
the end of 2015. Pictured, St Clair Beach in Dunedin. Photo
by Stephen Jaquiery.
The Reserve Bank has the interest-driving official cash
rate (OCR) on the move after more than three and a-half years
at 2.5%, but analysts are split on just how aggressively the
rises will be applied.
The Reserve Bank governor, Graeme Wheeler, nailed his colours
to the mast yesterday, saying that in order to keep inflation
at the bank's mid-point target of 2%, the OCR would have to
be raised by 2% in the next two years to keep inflation
settled, possibly with up to 1.5% in rises this year alone.
The OCR rose by 0.25 basis points to 2.75% yesterday.
Inflation is about 1.6% at present, but gaining impetus, with
the Reserve Bank's target range at 1% to 3%.
Economists and analysts were divided on just how quickly Mr
Wheeler would implement repeated OCR rises.
In response to the increase, the New Zealand dollar spiked to
a five-month high against the US dollar, to US85.55c, and was
initially up against the Australian, but then slid to about
A94.3c Higher interest rates attract more overseas
investment, which in turn strengthens the New Zealand dollar
and undermines returns for exporting manufacturers.
ASB chief economist Nick Tuffley said it appeared the Reserve
Bank was more likely to ''front-load'' the increases during
2014, because of a combination of greater inflation pressure
and the bank's ''strict adherence'' to 2% midpoint inflation.
The ASB had subsequently revised its OCR expectations,
predicting increases in April, July and December, then a
further four increases in 2015 to peak at 4.5%.
''Factors such as the risk of further New Zealand dollar
appreciation and a lot of uncertainty over how households
will react to OCR increases are reasons for expecting the
Reserve Bank will not lift the OCR three or four times in
immediate succession,'' Mr Tuffley said, noting the September
election would reduce probability of September or October
Craigs Investment Partners broker Peter McIntyre said while
the market was expecting total rises over three years of
between 2% and 2.5%, he was predicting a total 1% to 1.5%
rise over that period.
''The rate hikes will have to be more cautionary than
It's finely balanced. There remains a lot of global risk out
there to be considered,'' Mr McIntyre said.
Mr Wheeler had to consider the potential effects of China's
economy, especially given recent economic data indicating
cooling, and the divergence of the New Zealand dollar from
its Australian counterpart as that country's economy cooled,
The ANZ was forecasting three OCR rises, to 3.75% by March
next year, and the ASB expected four rises by December, to
hit 3.5%, plus four more increases next year, whereas Westpac
expected the OCR to hit 3.75% by December and 4.5% by
December 2015, Mr McIntyre said.
''One of Mr Wheeler's main concerns'' would be adding more
strength to the kiwi by raising the OCR, Mr McIntyre said.
''We're not that far off parity with the Australian dollar,
and markets are looking at US90c,'' he said.
Council of Trade Unions economist Bill Rosenberg said that
the Reserve Bank had not made a convincing case that general
inflation was a big enough risk to prompt raising the OCR.
''It appears that continuing wage stagnation and permanently
high unemployment are the price we pay for these policies,''
Mr Rosenberg said in a statement yesterday. BNZ chief
economist Stephen Toplis, while supportive of the OCR rise,
cautioned that currency rates had to be closely scrutinised.
He said if the Reserve Bank's threatened OCR rises resulted
in a much stronger New Zealand dollar then that, in itself,
could moderate the OCR track, particularly if such strength
was not offset by rising terms of trade.
''New Zealand is leading the developed-world pack in terms of
rate increases post the global financial crisis,'' Mr Toplis
It was a ''true reflection'' of a country in a very different
economic space from most of its peers, the combined strength
in dairy prices, construction and net immigration meaning
that growth this year was at, or above, the trend requiring
interest rates to move towards normal, Mr Toplis said.