Calls for a "more aggressive" approach to OCR

Economists identify "clear and present danger" aside from COVID-19

Calls for a "more aggressive" approach to OCR

Economists and other experts expect the Reserve Bank of New Zealand (RBNZ) to increase the official cash rate (OCR) next week. However, ASB economists have called on the central bank to take a more “aggressive approach.”

Like other experts, ASB economists expect OCR hikes at the next three RBNZ meetings, with the OCR tipped to reach its pre-pandemic level by the end of 2021.

However, in the latest ASB Economic Weekly report, ASB economists urge the central bank to consider the advantages and disadvantages of starting with a 50bps increase.

“Last week, we changed our call to expect 25bps rate hikes at each of the next three available RBNZ meetings, which would get the OCR back to its pre-pandemic level by year-end. As Lisa Carrington has shown the world, a fast start can pay dividends.  And so it would also be worth the RBNZ considering the pros and cons of starting with a 50bps lift,” said ASB senior economist Mike Jones.

“The traditional argument against is that a double-up can spook markets and cause volatility. But markets are already pricing a 12% chance of a 50bps raise, and we doubt a 50bps lift would surprise the economic consensus.”

Read more: Industry releases forecasts following OCR announcement

ASB economists noted the possible impacts of the COVID-19 Delta variant. However, they stated that the “clear and present danger” is that the country’s economy continues to overheat, allowing inflation to “get away.”

“If things change down the track (*touch wood*), the RBNZ can always back off, just like we saw from the Reserve Bank of Australia last week,” Jones said.

The economists also pointed to housing as another factor to consider, with annual house price inflation still chugging along at a 15% to 20% annualised price.

“We never bought into the dire predictions for house prices we saw in the wake of the government’s tax changes. And, indeed, momentum has slowed a little, but not enough,” Jones added. “This week’s only notable economic data release – REINZ housing figures for July – is likely to highlight the point.

“The RBNZ is frustrated with continued ‘risky lending’ and is going back to the macroprudential tool-shed to find a bigger hammer. Ideally, it wouldn’t have to. Using interest rates to douse the housing market is cleaner and potentially less distortionary. Making a fast start with interest rates – whether it’s three 25bps hikes in a row, or an initial 50bps – might avoid having to play catch up down the line. With one eye on COVID, it seems to be the path of lesser regret.”