RBNZ to raise OCR to counter galloping inflation expectations

Tuesday 27th July 2010 4 Comments

The Reserve Bank of New Zealand will raise interest rates on Thursday to counter galloping inflation expectations which could pose a danger if they trigger faster rising wages and prices, says Matthew Circosta, an economist at Moody's Analytics.

“Surveys indicate inflation expectations are at the top end of the central bank's comfort level and could accelerate if firms begin to lift prices,” Circosta said.

The central bank's official cash rate (OCR) currently stands at 2.75% and Circosta expects it will raise it to 3%. His view is shared by all the other economists who analyse the New Zealand economy and pricing in the wholesale interest rate market indicates a similar view.

Circosta says spikes in government taxes will push headline inflation above the top of the Reserve Bank's 3% target this year which has already sent year-ahead inflation expectations surging. That's despite inflation for the year ended June coming it at a lower-than-expected 1.8%.

“Even if near-term inflation expectations retreat, the central bank has little room to breathe and faces a tougher task managing steadily rising medium-term inflation expectations,” he said.

“Anchoring these expectations might become harder as firm's ability to raise prices improves with the recover.”

Skilled labour is becoming harder to find, suggesting employment and wages will also be stronger. All this could require further OCR rises in coming quarters, Circosta said.

Businesswire.co.nz

Comments from our readers

On 27 July 2010 at 2:32 pm paul said:

I can only say these guys must be living in a different country to me....the only price rises I am seeing is because the KEY GOVERNMENT has increased ACC,car and van regos,Thick Smiths ETS,along with a number of other brain dead taxes....try getting paid on time in the building industry....run away inflation ..what a joke...and how many good kiwis headed over to Aussie in the last quarter John?..is that egg on your face.

On 27 July 2010 at 8:23 pm Bart said:

@pm paul. I think the key word here is "expetations". Actual recorded CPI inflation for the latest quarter was just above 0%, excluding sin tax increases - and the RBNZ & Moodys are well aware of this. The inflation expectations come from low income workers (i.e. the majority of us) demanding higher wages to compensate for taxes. Query whether classical Keynesian monetary theory is right... Does the OCR work? I hope that retail interest rates already price in the increase - I just made some term deposits on that basis...

On 28 July 2010 at 9:31 am Mark said:

These guys are in cloud cuckoo land. Every business I have spoken to, ranging from service sector, food, building, manufacturing have just reported their worst two months on record. Only inflation is in liquidators fees.

On 28 July 2010 at 11:14 am Post said:

I don't get it. When on the way down the last percentage or so drop of the OCR had no effect at all in the retail interest rates. It had stopped being effective. Somehow on the way up that slack has all of a sudden disappeared and the retail rates go up in sync with the OCR?