1.5% in OCR rises this year possible

Mortgage holders and business borrowers can expect up to eight more official cash rate rises by...
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 increase.

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 expected.

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, he said.

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 said.

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.

- simon.hartley@odt.co.nz


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