The Reserve Bank is expected to lift the official cash rate
to 3.25% on Thursday but finding a clear signal on the
chances of a July increase is expecting too much, economists
Much interest will be on the tone of the accompanying
Monetary Policy Statement (MPS) with the Reserve Bank's
updated forecasts likely to suggest there is a little less
urgency to lift the OCR further.
Interest rates and the currency are expected to get a boost
following the MPS release on Thursday.
The strength of migration, the more recent pull-back in the
value of the New Zealand dollar and the prospect of a bumper
first-quarter GDP figure all provide valid reasons for
keeping an imminent OCR follow-up on the table.
ASB chief economist Nick Tuffley said the Reserve Bank should
be taking stock of what appeared to be a more prolonged
benign inflation environment.
The housing market continued to lose momentum, even with
migration steadily surprising the Reserve Bank since the
second half of last year.
Near-term inflation and wages remained muted.
''A key influence on the inflation outlook will be whether
the Reserve Bank rethinks the impact added net migration is
having in boosting labour supply and the economy's growth
capacity,'' he said.
After June, the individual OCR windows would carry more
uncertainty about the outcome and be heavily influenced by
events, Mr Tuffley said.
Westpac chief economist Dominick Stephens also expects the
OCR to rise on Thursday and is predicting ''quite a
reaction'' on financial markets with swap rates and the
exchange rate rising.
Since April, markets appeared to have become more sceptical
about the extent of the Reserve Bank's hiking cycle.
Interest rates had fallen to the point where swap market
pricing indicated an expectation the OCR would be 4% by the
end of next year.
In March, the Reserve Bank's forecasts implied the OCR would
be 4.5% at that point, he said.
''This drop in market interest rates will be worrying for the
Reserve Bank because it is prompting banks to reduce fixed
The average two-year fixed mortgage rate advertised by the
four main banks had fallen 34 basis points (0.34%) in two
Lower mortgage rates could reignite the housing market, Mr
''This market-driven drop in interest rates is inconsistent
with recent developments. On balance, New Zealand economic
developments since April have tended to support the case for
further OCR hikes.''
The exchange rate had fallen in recent weeks, the Government
had issued a surprisingly expansionary Budget, which would
further the need for OCR rises, and net migration had
continued to boom.
The importance of booming net migration on the Reserve Bank's
thinking on the housing market and inflation pressures could
not be overstated, he said.
At a glance
• Official cash rate to rise to 3.25%.
• Reaction expected with swap rates and exchange rate rising.
• Pause expected in OCR cycle, but will not be signalled.
• Net migration will play a major role in future thinking.
• Banks already dropping fixed-term mortgage rates.