Reserve Bank may surprise markets
The Reserve Bank may surprise some market participants by reiterating plans to lift the official cash rate by two percentage points over two years in next Thursday's policy statement, in the face of surging migration, a weaker kiwi, stimulatory fiscal spending and a growing economy.
Governor Graeme Wheeler will lift the OCR by a quarter point to 3.25 per cent next Thursday, according to 16 of 17 economists in a Reuters survey.
The rate reaches 3.5 per cent by year end, based on the median expectation.
Since the central bank's March monetary policy statement, figures have shown inflation accelerated a lower-than-expected 0.3 per cent in the first quarter, while there are signs heat in the housing market is dissipating, at least partly in response to curbs on low-equity loans.
That's helped stoke expectations that the tightening cycle will be less severe than suggested in the last monetary policy statement (MPS).
Yet annual net migration is expected to peak at close to 40,000 this year, more than three times the long-term average, while last month's budget added $500 million a year to government spending and the trade-weighted index this week fell to a three-month low of 78.58, reducing the impact of a high kiwi in mitigating imported inflation.
"Compared to the March MPS, the RBNZ might sound a touch less worried about inflation and the forecast of 90-day interest rates might be downgraded by 10 or 20 basis points," Westpac Banking Corp chief economist Dominick Stephens said in a MPS preview.
"But this will be detail around the edges - the main point of the document will be to communicate that further hikes are coming."
He said one of the central bank's key aims could be "to bring errant financial market pricing back into line with its own thinking".
That's a view shared by Kymberly Martin, senior market strategist at Bank of New Zealand, who says swap rates have declined from their peaks of recent months and appear to be pricing in a weaker tightening cycle.
"We believe the market is now complacent on the outlook for the OCR, pricing in little more than 50 basis points of hikes by year-end and just 130 basis points over the next two years," she said.
"At next week's meeting we believe the RBNZ will remain committed to raising the OCR by around 200 basis points over this period."
