A couple of economists would go for hikes in official interest rate rises right now

The NZ Institute of Economic Research's "shadow board" comprised of leading economists, academics and business people, has had an overall marked change in sentiment toward the need for interest rate rises.

The "board", which offers its own view of where interest rates should be ahead of the Reserve Bank's decisions on official rates, is on balance, picking that rates should stay unchanged.

But there is a growing view that rates should rise, even though there is no widespread belief that the RBNZ is even close to contemplating rate rises yet.

Indeed it's universally accepted in the 'marketplace' that the RBNZ will tomorrow leave official interest rates at the 2.5% they have been at since March 2011.

The RBNZ has itself indicated rates will be unchanged this year and that it will begin to raise rates next year, with its own forecasts for about two percentage points of rate rises by 2016.

But at least some economists now believe there should be rate rises straight away.

Since March 2012 the NZIER has been running its "shadow board" exercise with these original goals:

• to encourage informed debate on each interest rate decision
• to help inform how a board structure might operate relative to New Zealand’s current single decision-maker model, where the Governor is responsible for making each decision
• to explore individual board members using probabilities to express their uncertainty.

The nine-strong board, consisting of a mix of economists, academics and business people, each separately gives a personal view of where they think interest rates should be ahead of the RBNZ's official decision.

Shadow board participants share out 100 points across possible interest rates to indicate what they believe is the most appropriate official cash rate setting for the economy.

For example, if a board member is mostly in favour of rates being 2.5% but also in part has a view there is merit in them being 2.75% they can allocate say 65 of their hundred points to a 2.5% rate and say 35 points to 2.75%.

Combined, these scores form a shadow board view ahead of each monetary policy decision. Participants’ show where they think interest rates should be, not what they believe will happen.

While the overall view of the shadow board ahead of this week's OCR decision was that rates should be unchanged, there has been a marked shift since the last rates decision in September.

Two "board members", the NZIER's principal economist Shamubeel Eaqub and BNZ head of research Stephen Toplis have shifted very firmly in favour of there being a rate rise now.

It was only a year ago that there was a strong inclination among board members to actually reduce rates.

RBNZ 'needs to act'

Eaqub said that an "overheated housing market" meant that the RBNZ "needs to act".

"They are currently using macro-prudential tools [principally through introduction of "speed limits" on high loan-to-value lending].

"I believe this is inviting political interference into central bank independence. It would be better to raise interest rates and manage the economic risks, or adjust bank capital requirements, as part of micro-prudential settings," he said.

BNZ's Toplis said that all the indications were that interest rates should be quickly returning to "neutral" given that growth was returning to "trend".

"The impact of LVR restrictions does, however, leave substantial risks to the outlook. Please note that our picks are definitively what we think should be the case not what we are forecasting."

Moving toward rises

While the views of Eaqub and Toplis have moved the most since September, five of the nine board members have moved more toward believing rate rises are appropriate - some just very slightly, while two have remained the same and just one, ANZ's chief economist Cameron Bagrie, is very slightly less inclined toward a rate rise now.

Professor Prasanna Gai from the University of Auckland is new on the board, but is somewhat more inclined toward a rate rise than his predecessor on the board Christoph Thoenissen of Victoria University was.

NZIER's senior economist Kirdan Lees noted that "most members" had recommended leaving rates on hold.

"Nonetheless the Board’s preferences are shifting, with more support than in previous months for higher interest rates. Auckland’s housing market is very bubbly, risking a costly downwards correction in house prices in the future. Two Board members recommend raising rates right now to start addressing this risk."

In addition to those already mentioned, the board also consists of Westpac chief economist Dominick Stephens, Victoria University Professor Viv Hall, NZ Steel & Tube chief executive Dave Taylor, Business New Zealand chief executive Phil O'Reilly and MYOB executive director Scott Gardiner.