Cash rate set to rise further
The Reserve Bank is likely to raise the official cash rate (OCR) aggressively to get a handle on rampant inflation.
That’s according to experts at ANZ Bank in the wake of data showing the annual inflation rate rose to a decade-hight 4.9 per cent in the September quarter.
As a result, the country’s biggest retail bank believes the Reserve Bank can no longer be gradual and cautious in tightening policy.
ANZ Bank economists have revised their forecasts and are now picking six rapid-fire 25 basis point rises at each of the monetary reviews to next August to take the cash rate to two per cent, where it was in mid-2016.
“The very strong inflation pulse has taken away the luxury of time and caution as the OCR has more work to do,” say ANZ’s economists.
“We feel pretty confident in saying we probably haven’t seen the worst of inflation yet. Not only have we seen oil prices spike on concerns about a global energy shortage, supply-chain pressures are going to get worse in the near term.”
ANZ now expects annual inflation to reach 5.8 per cent by March 2022 before gradually easing back to two per cent by the middle of 2023.
The bank’s economists accept there is much uncertainty, such as global supply-chain issues and oil prices, but notes that even after removing some volatile items, core inflation is still sitting above the Reserve Bank’s target of two per cent and is set to go higher.
“Interest-rate hikes out to August 2022 should be effective at dampening the domestic inflation impulse,” says ANZ’s economist.
“Many households are highly indebted after taking on massive mortgages during a year where house prices rose over 30 per cent, so even a small increase in interest rates will have a significant impact for those households.
“By reducing appetite to borrow and making indebted households more price-sensitive, rate rises still throw sand into the gears of the inflation process by impeding the pass-through of costs.
“Lower demand means less inflation pressure than otherwise, regardless of the mix of demand and supply developments that kicked it off.”
The economists add increasing interest rates have already started to tighten policy, reports RNZ. But Reserve Bank rate rises would also boost the chances the housing market could turn sharply, with flow-on effects for spending and construction, and businesses could stop investing and hiring.
