The Reserve Bank of New Zealand is set to raise its benchmark interest rate for the second time in as many months.
The central bank on Thursday is expected to lift the official cash rate (OCR) a quarter point to three per cent, a level it last saw in January 2011, according to all 15 economists in a Reuters survey.
At last month’s monetary policy statement, governor Graeme Wheeler noted that growth was absorbing spare capacity in the economy, and “inflationary pressures are becoming apparent”.
Figures for the first quarter confirmed that trend, with non-tradable inflation of 1.1 per cent, up from 0.5 per cent three months earlier.
Yet tradables inflation – goods and services that are imported or in competition with foreign goods – weakened in the face of a persistently high dollar.
It meant overall inflation in the quarter was 0.3 per cent – below the central bank’s 0.5 per cent forecast.
Meanwhile, dairy product prices have extended their slide by a further 16 per cent since the March statement, based on the GlobalDairyTrade price index, which may be a sharper drop than the bank had anticipated, raising a question over a follow-up to this week’s expected hike.
“In our view, concern over the speed and magnitude of dairy price falls and discomfort with the strong NZD’s decoupling from commodity prices would indicate the RBNZ is far from committed to lifting the OCR in June,” ASB chief economist Nick Tuffley said.
This week’s interest rate review “will strike a more cautious tone than previously, mainly due to the high exchange rate and soft inflation data,” Imre Speizer, director of NZ rates strategy at Westpac.
“We see no chance of a hawkish outcome, since the only positive development of relevance is stronger migration but that is a modest offset.”
Government figures last month showed New Zealand’s inbound net migration rose to a 10-year high 3,500, seasonally adjusted, in February, the most since April 2003. Inbound migrants tend to stoke demand and prices for everything from houses to the appliances and furniture to fill them.
The trade-weighted index was recently at 79.63, holding above the average 78.4 level the central bank has assumed for the first half of 2014.
This week’s review will be delivered as just a one-page statement from the Reserve Bank, so it won’t telegraph specific changes to the long-term trend in interest rates as the monetary policy statement does.