How likely is an official cash rate increase in April?

ASB has released its April monetary policy preview highlighting a 50/50 chance of the official cash rate increasing by 0.25%, or as much as 0.50% on 13 April.

The bank is predicting a hike of the official interest rate to 2.75% by early 2023, with a more strident path of OCR hikes later this year followed by eventual fallbacks.

ASB senior economist Mark Smith said it was clear the OCR needed to increase despite global and external pressures.

“An increase to the OCR should mitigate immediate financial market reaction from just a 0.25% move and largely sustain the tightening in financial conditions the Reserve Bank has already engineered,” Smith said.

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Smith said despite New Zealand facing a high volume of daily COVID cases, easing of border restrictions could ease labour market pressures.

“Many of these occurrences are either out of the RBNZ’s control or something the RBNZ should not be unduly concerned with,” he said.

Smith said inflation was miles above target and was set to move higher in the short term.

“Surveyed inflation expectations have been moving steadily higher and are migrating north of 3%,” he said.

Smith said the RBNZ not delivering on an OCR hike would be perceived as going soft on inflation, which would not be a good look.

“Financial markets are doing much of the RBNZ’s tightening for it and further monetary tightening (via higher retail interest rates) is already in the pipeline,” he said. “The economic outlook over the monetary policy horizon is still highly uncertain.

“It may not be advisable to have policy settings further tighten in relation to global peers. Global pandemics have proved to be inflationary with emergency OCR cuts compounding issues facing the RBNZ.”

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Smith said the Ukrainian war and overseas central bank actions also influence the NZ economic outlook and broader financial conditions.

“If evidence builds that high inflation has become embedded, the RBNZ will be more open to delivering a hike in May, with the published interest rate track expected to show more strident RBNZ hikes and a higher OCR peak than the 3.35% signalled in February,” said Smith.