Signal from RB not expected

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 say.

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 mortgage rates.''

The average two-year fixed mortgage rate advertised by the four main banks had fallen 34 basis points (0.34%) in two months.

Lower mortgage rates could reignite the housing market, Mr Stephens said.

''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.


 

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