Why economists think yesterday's big OCR hike was right

Yesterday's decision by the Reserve Bank (RBNZ) to lift the OCR by 50 basis points to 1.5% will be followed by a similar move in May, according to Westpac economists.

That in turn will be followed by a series of 25 point hikes for the remaining reviews this year

This would bring the OCR to a peak of 3% by November, instead of mid-2023 as they earlier forecast.

Westpac economists think the RBNZ methods will be effective.

“Our view is that by the end of this year, the RBNZ will be pleasantly surprised by how much traction it’s getting on the economy,” they said.

They add that moving by a higher rate now will spare homeowners much harsher treatment later.

The RBNZ itself portrayed its actions as 'a stitch in time.'

ASB economists say it was clear the OCR needed to go up, and it too thinks there will be another 50 point rise in May.

As with Westpac, ASB is forecasting a further series of 25 point rises for the rest of the year, but is predicting a higher end point: 3.25%.

Kiwibank economists say a cash rate of 1.5% is still deemed ‘stimulatory’, so more hikes are coming. As with the other banks, Kiwibank thinks the next jump will be another 50 point rise, and

the OCR will reach 3% by November.

The RBNZ is clearly focussed on inflation and inflation expectations, they say.

“We expect inflation to peak at 7% in the first quarter, and inflation expectations will most likely rise further in the meantime,” Kiwibank economists said.

“Rising expectations clearly threaten the RBNZ’s mandate and credibility, something the RBNZ is clearly unwilling to accept.”

They add wholesale rates markets have factored in the higher rate path.

“Wholesale funding costs for banks have risen sharply. Mortgage rates have risen in response, and we expect to see further hikes from here.”