Another rise in interest rates by the Reserve Bank (RBNZ) seems certain this week. The only issue is how large will it be.
RBNZ Governor Adrian Orr has a big decision to make on rates. Photo:
The consensus is narrowly for a 25 basis points (a quarter percentage point) rise to 1.25 percent, but the odds of a 50 basis point rise are put between 80 to 90 percent.
The reasons for the rise are familiar - rampant inflation at a 30 year high of 5.9 percent, and forecast to hit as high as 7.5 percent by the middle of the year, and a labour market that has gone from sizzling to red hot.
ANZ chief economist Sharon Zollner is at the hawkish end of the spectrum and said the RBNZ could not afford a softly-softly approach.
"The RBNZ has a big job to do to rein in runaway inflation, and the sooner they rip into it, the lower the economic cost is likely to be."
The RBNZ started ahead of most central banks in unwinding the Covid-19 easy money policies, with rate rises in September and November last year, and a third in February to 1 percent.
Governor Adrian Orr said a 50 basis point rise at the last meeting had been on the cards, but the "finely balanced" decision had been based on a dose of caution ahead of the expected surge in Omicron.
Zollner said there was no easy option for the RBNZ.
"On the one hand, the path ahead for the economy is looking anything but smooth, with house prices falling and consumer confidence pummelled as household budgets are squeezed."
"On the other hand, the wall of inflation is vertical and so far, completely unyielding."
She said for the RBNZ's own credibility as an inflation fighter and the future health of the economy, a hefty rise was needed with another 50 basis point rise in May, to minimise the risk of a later big hit to growth and employment.
Inflation and a changing housing market will be key in the decision. Photo: 123RF
Not so hard on the brakes
BNZ head of research Stephen Toplis said it was a toss of the coin between a smaller or larger rate rise, but there was a case for a more gradual approach.
"A further 25 point nudge in the cash rate, accompanied by a stern warning that a more aggressive interest rate track will likely be forthcoming when it releases its May Monetary Policy Statement, might be a better approach."
He said this would have less impact on retail rates, give the RBNZ a chance to get the public on its side for any future big rises, and reduce the risk of recession if geopolitical and pandemic risks increase.
Salt Funds Management economist Bevan Graham said the threat of bringing economic growth to a halt existed, regardless of which course the RBNZ took.
"If they go too fast they might tip the economy into recession, but there's a risk that they don't go fast enough, and they don't get on top of inflation now."
"There's a risk they'll need more aggressive action to get inflation expectations back in the box and that could be more damaging .. so getting to neutral quickly reduces either risk of recession."
The RBNZ's last monetary policy statement implied the neutral for the OCR - the level at which it neither stimulates nor restrains growth - would be around 2 to 2.5 percent.
The central bank has raised the OCR by 50 basis points on three occasions, in November 1999, March and May 2000, not long after the OCR was introduced and the annual inflation rate was sitting at 2 percent.