ASB economists are suggesting the Reserve Bank consider lifting the Official Cash Rate (OCR) by 50 basis points next week and say interest rates can be used to 'douse the housing market'.
The OCR is still at the emergency level of 0.25% that the RBNZ dropped it to as Covid began to bite in March 2020. The central bank has its next review of interest rates on Wednesday, August 18, and most economists now believe it will raise rates then - but the general expectation is for a 25-basis-point rise to 0.5%.
However, ASB senior economist Mike Jones is suggesting the RBNZ could look at a 50bps rise.
"...A fast start can pay dividends. And so it would also be worth the RBNZ considering the pros and cons of starting with a 50bps lift. The traditional argument against is that a double-up can spook markets and cause volatility. But markets are already pricing a 12% chance of a 50bps raise, and we doubt a 50bp lift would surprise the economic consensus," Jones says.
He says the RBNZ has already met its inflation and employment objectives.
"Actually, we now know it probably met them a couple of months ago," Jones says.
"There’s still debate about the permanence of the upcoming spike in headline inflation. But core inflation is likely to remain above 2%. Further, last week’s labour market data confirmed we’re at, or above, Maximum Sustainable Employment. Sub 4% unemployment beckons next quarter and we expect wage growth to accelerate further. And yet, the Official Cash Rate is still at 0.25%."
ASB last week changed its call and is expecting the OCR to be back to its pre-pandemic 1.0% level by the end of the year.
Jones says "yes, there are risks" from the spreading Covid Delta variant and the Australian outbreak is "too close for comfort".
"But the clear and present danger is that economy continues to overheat, allowing inflation to get away. If things change down the track (*touch wood*), the RBNZ can always back off, just like we saw from the Reserve Bank of Australia last week."
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The other reason to get a "fast start" to rate rises is housing, Jones says.
"We never bought into the dire predictions for house prices we saw in the wake of the Government’s [March] tax changes. And, indeed, momentum has slowed a little, but not enough. Annual house price inflation is still chugging along at a 15-20% annualised pace. This week’s only notable economic data release – REINZ housing figures for July – is likely to highlight the point."
Jones notes that the RBNZ is frustrated with continued “risky lending” and is going back to the macroprudential tool-shed to find a bigger hammer.
"Ideally it wouldn’t have to. Using interest rates to douse the housing market is cleaner and potentially less distortionary. Making a fast start with interest rates – whether it’s three 25bps hikes in a row or an initial 50bps – might avoid having to play catch up down the line. With one eye on Covid, it seems to be the path of lesser regret."
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