Will the Reserve Bank raise interest rates this week?

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Reserve Bank governor Adrian Orr is widely tipped to hold the OCR steady later this week.
Photo: RNZ

The Reserve Bank is expected to hold rates steady on Wednesday with inflation still stubbornly stuck above the central bank’s target range.

A Reuters poll of 28 economists last week showed all but one expected the central bank to hold the Official Cash Rate (OCR) at 5.5 percent.

Despite easing in the final three months of 2023, annual inflation – at 4.7 percent – remained well above the central bank’s target range of 1 to 3 percent.

BNZ head of research Stephen Toplis agreed with the majority and expected no change to the OCR, but he said there was always a risk of a rate hike.

“There may be things that the Reserve Bank (RBNZ) sees or interprets in a different way than we see things, and certainly the comments from Reserve Bank staff over the last few weeks have been very hawkish,” Toplis said.

“But you never quite know why they’re hawkish. Is it because they’re warning that they’re going to raise interest rates or was it because the market was pricing in four rate cuts this year and they clearly don’t want that? So perhaps they were just pushing back against that.”

Toplis said while the RBNZ had been talking tough, he believed a rate cut was on the horizon given the state of the economy.

He said various indicators have all pointed to why the RBNZ did not need to raise rates.

Concrete production in the fourth quarter was 12 percent down on a year ago and fell in each of the past eight quarters, Toplis said.

Inflation expectations fell in the RBNZ’s recent survey, and retail sales also fell sharply in the final three months of 2023, he said.

“The Reserve Bank at their last monetary policy statement said there’d be no rate cuts until 2025,” Toplis said.

“I’d be surprised if they changed that view in the upcoming monetary policy statement, but we still think that the economy is deteriorating rapidly enough, and inflation pressures are diminishing fast enough that we should be able to see a rate decrease before the end of this year.”

The risk of a hike

A rate hike does remain a real possibility this week.

ANZ Bank’s economists recently pencilled in a 25 basis-point rate hike this week, with a possible follow-up hike in April.

“Given the uncertainty around the outlook, with both the demand and supply sides of the economy moving, there’s not a lot to be gained for the RBNZ by narrowing its options,” ANZ chief economist Sharon Zollner said.

“Our baseline expectations that the [Monetary Policy] Committee will publish an OCR track that gives a decent nod to the chance of a follow-up OCR hike to 6 percent, but which doesn’t lock them into anything,” she said.

Zollner said the main vulnerability in her hike call was “the possibility that the RBNZ could read quite a bit into the surprisingly weak” production data in the third quarter.

“The committee could of course decide that the ongoing fall in headline inflation buys them a bit more watch-worry-wait time for evidence to accumulate that the OCR needs to go higher, given the lags with which monetary policy affects the economy,” she said.

The RBNZ is scheduled to publish its decision at 2pm on Wednesday.