Economists see the latest very strong GDP figures as providing a green light for the Reserve Bank (RBNZ) to begin raising interest rates as soon as next month.
The RBNZ was clearly poised to increase the Official Cash Rate from the current 0.25% at its last review in August. However, the central bank held fire as the country went into Level 4 lockdown on the very day it made its decision.
But the RBNZ has itself subsequently indicated it's not likely to hold off on raising rates for long. And economists believe the economy will again bounce back quickly from lockdown as it did last year. Therefore the expectation is that the capacity and pricing pressures that were there prior to lockdown will still need addressing through higher interest rates.
The next RBNZ rate review is on October 6.
ASB senior economist Mark Smith said NZ's GDP had managed "a massive 2.8% climb" in the June quarter - suggesting that "the heady pace of momentum had strengthened prior to the current community Covid-19 outbreak and the economy was on the cusp of overheating if it was not already doing so".
The RBNZ had itself forecast only a 0.7% rise for the June quarter GDP.
"In our view the RBNZ will look through the near-term disruption caused by the outbreak and the path of least regrets still necessitates some removal of monetary stimulus," Smith says.
"A gradual series of 25bp OCR hikes beckon, starting from October."
The ASB economists have "pencilled in" 25bp hikes in October, November and February 2020 that will take the OCR back to pre-pandemic levels (1%).
"Beyond that we envisage the OCR peaking at a historically low 1.50% from the end of next year," Smith says.
Kiwibank economists say "the stars have aligned" for rate hikes.
"A red-hot economy, tight labour market, rising consumer prices, and eye-popping house price growth.
"When the stars align like this, a rate hike is imminent.
"There’s little need for monetary policy settings to remain so stimulatory. We’re no longer in a recession. The RBNZ has already called time on its bond-buying programme (LSAP). The next move should have been a rate hike in August. But cue the Delta outbreak. However, a softer blow and rapid rebound from the Delta Lockdown is expected. The RBNZ is unlikely to be blown off course.
"We expect the RBNZ to follow-through in October, with three hikes to 1% by February 2022. Further rate hikes will be dependent on how the economy responds to rising mortgage rates. But we expect the cash rate to move to 1.5% by this time next year. All lending rates, and savings rates, will push higher into next year," the Kiwbank economists say.
ANZ senior economist Miles Workman says "it might sound strange to some" that an OCR hike is on the menu come October "even though economic activity has fallen off a cliff" in the third quarter we are currently in.
"But we should remember that the RBNZ is an inflation-targeting central bank and that the supply shock that comes with lockdowns means inflation and inflation expectations are unlikely to fall off the rails any time soon," Workman says.
He says while the impacts on economic momentum over the medium term are arguably a lot less certain (and more important for the monetary policy outlook), "we know fiscal policy is stepping up, is effective at protecting jobs, confidence, and household incomes, has plenty of ammo, and is better placed to provide the targeted support that is needed now".
Therefore "this resource-constrained economy" is still likely to need a little less monetary stimulus ("particularly the still-nutty house price impulse") even though many are still doing it tough "and some data are about to look terrible".
"Simply put, [the RBNZ] not tapping the brakes slightly now would add to some pretty significant boom-bust risks."