Westpac economists say the Reserve Bank would run the risk of portraying itself as a "maverick central bank acting without consensus or comprehensive analysis" if it were to hike interest rates as soon as next week.
The RBNZ has its first review for the year of the Official Cash Rate - the tool through which it influences the country's interest rates - on Thursday, January 30.
While interest rate rises this year have been well signposted and are seen as a certainty, a healthy debate has developed as to whether the RBNZ will move the rates up next week - or wait till its March review.
The RBNZ has two types of alternating review, one involving a simple one page press statement while the other includes a full five chapter accompanying Monetary Policy Statement, press conference led by RBNZ Governor Graeme Wheeler and a following Finance and Expenditure Select Committee appearance by the Governor.
Next week's review involves just the simple press statement, while the March review includes the full, bells and whistles, Monetary Policy Statement.
While economists had for the most part believed that the RBNZ would wait till March - and the full chance to explain itself - before its first hike of the OCR, the chances of the RBNZ actually moving on rates next week have been seen as growing, particularly following the release this week of figures showing that inflation was stronger than expected in the December quarter.
The ANZ has been at the forefront of those suggesting that rates will be hiked next week.
But Westpac chief economist Dominick Stephens said in a preview of next week's OCR statement that hiking in January would "give the RBNZ’s critics more ammunition".
"...Increasing interest rates inevitably cops criticism in a debtor nation like New Zealand. This is a serious issue for the RBNZ, as large chunks of the political spectrum are hostile to the monetary policy framework. The central bank has already made itself unpopular in some circles with its high-LVR mortgage restrictions, and is probably keen to avoid further acrimony," he said.
"A January hike would take the public by surprise, and might seem the actions of a maverick central bank acting without consensus or comprehensive analysis.
"By contrast, in March the Governor could cite the plethora of analysis and explanations that go into a full Monetary Policy Statement. He could note that all private sector forecasters predicted and recommended a March hike (not true of January). And he could (presumably) cite the informed support of the two external advisors on the Monetary Policy Committee (who do not attend the meetings preceding OCR Review decisions). A March hike would be a consensus decision, unlike January," Stephens said.
He said the flow of recent economic data in New Zealand made it clear that the OCR needs to go up this year.
The economy was probably expanding at greater than 1% per quarter over the second half of 2013. Business confidence is at multi-decade highs. The terms of trade remain at their highest level since the early-1970s. And inflation is rising more quickly than expected, although it is still below the RBNZ’s 2% target.
"Our key theme for the past couple of years has been that the Canterbury rebuild combined with rising house prices would boost GDP growth and generate inflation pressures that require a substantial hiking cycle from the Reserve Bank. Our long-held forecast is now coming to pass. True, the exchange rate is high and the housing market is slowing. But neither is much different to what the RBNZ expected at the time it laid out its plan to hike the OCR gradually over 2014," Stephens said.
He said with all the accompanying economic data, a strong case could certainly be mounted for hiking the OCR next week.
But while it was "certain" the RBNZ would consider that option, "and it might be a close call" it was more likely that the RBNZ would wait until March before actually hiking.
"The benefit of hiking in January is that interest rates will get to where they need to be more promptly. But this benefit is only slight. If the central bank’s intentions are clearly and credibly signalled, financial markets should lift term interest rates well in anticipation of a hiking cycle, achieving many of the RBNZ’s goals early. This is exactly what has happened in the current cycle – term interest rates have already risen substantially.
"Admittedly, the floating mortgage rate is important, and is tied to the OCR. Lifting it now would be better – but waiting an extra six weeks is not dramatically inferior. If the economic benefit of hiking now is slight, the communications benefit of waiting until March is substantial," Stephens said.
He said January’s one-page press release would give the RBNZ very little opportunity to respond to any criticism.
"The critics could gain sway in the media, while the RBNZ itself would be mute until the next speech opportunity. By contrast, the RBNZ could grab the initiative in March via its press conference and the fuller explanations in the Statement.
"A January hike would also risk generating financial market volatility, which the RBNZ is explicitly instructed to avoid. Without explicit guidance on future hikes, markets could easily extrapolate from a January hike and send term interest rates higher than the Reserve Bank intends. In turn, this would lead to a large increase in the exchange rate. The central bank would have to work to unwind any such overreaction later."
Stephens said that in contrast, by signalling imminent hikes next week and then "pulling the trigger" in March this would be a path to smaller financial market reactions. The RBNZ could be quite precise about the shape of the OCR hiking cycle it envisages at the full March Monetary Policy Statement¸ and would be more certain that term interest rates will land at the intended level.
"The RBNZ has little to gain by hiking in January, and much to lose. A poorly communicated hike risks market volatility and is a gimme to the RBNZ’s detractors. The least-regrets option is to wait until the full March Monetary Policy Statement."