Inflation to "force" OCR hike

Jeremy Couchman, Kiwibank Senior Economist

It comes as September inflation figures showed a stronger-than expected 0.9% quarter on quarter increase, taking annual inflation up to 1.9% -- just below the Reserve Bank's 2% target mid-point. Rising inflation and GDP growth are needed before the central bank considers a hike. 

Jeremy Couchman, said rapidly increasing inflation, driven by house price increases and the 20% year on year increase in petrol prices (which contributed to 40% of the annual inflation gain) would leave the Reserve Bank in an "awkward position". 

The economist said the Reserve Bank's view that inflation would "gradually" rise to the target mid point was "increasingly untenable". Couchman added: "For now at least, the RBNZ can still claim that much of the recent rise in inflation pressure is coming from cost-push inflation factors that can be looked through."

Couchman said inflation was "on the charge", and predicted "momentum is likely to build". He said this would ultimately force the central bank to move forward its timeline on lifting the OCR: "We see GDP growth picking up above trend into 2019, and inflation is likely to accelerate. We believe that ultimately the RBNZ will be forced to begin gradually hiking the OCR sooner than is currently signalled. We believe the RBNZ will be able to hike by May 2020, 6 months ahead of their schedule."

The views were largely echoed by Westpac's Michael Gordon, who said imported and domestic inflation figures were "picking up gradually" and the lower Kiwi dollar also had an effect on rising prices. 

Gordon said the odds of a rate cut had fallen following the inflation data: "The RBNZ has warned that if the data failed to support a pickup in inflation, it would reduce the OCR. We took that seriously at the time, but our central view was that a range of more positive data would most likely dissuade the RBNZ from cutting. That is the way things are panning out. The odds of a rate cut over the coming year, which we initially put at one in three, are receding."

The bullish views on the OCR come despite the Reserve Bank's claims the next move could be "up or down". The dovish language used by the bank in its last MPS announcement led some economists, including those at ANZ, to predict a cut before a hike. ANZ expects the Reserve Bank to "look through" inflation data and focus on global market volatility at its next MPS announcement, due in November.