Inflation is already running hot and is likely to go above 5 percent - so if the official cash rate rises by half a percent next month, it won't be a surprise, a bank economist says.
It comes as price increases are at the highest level in a decade. Latest Statistics New Zealand Consumer Price Index figures show that over the year to September 2021, prices rose 4.9 percent. The 2.2 percent quarterly jump marks the biggest quarterly rise seen since 1987 (excluding GST impacted periods).
Bank of New Zealand (BNZ) head of research Stephen Toplis told Newshub supply constraints combined with a tight labour market likely mean inflation hasn't yet peaked.
"The next two are almost certain to be above 5 [percent]... and it's set against the backdrop of a really tight labour market," Toplis said.
While there's no set figure acting as a trigger for more aggressive interest rate hikes, 5 percent is indicative of inflationary pressures existing throughout the economy, he said.
When people businesses see prices move up, they tend to become more comfortable putting their own prices up, he said, whether it be selling prices - or looking for wage increases. And those pressures aren't likely to change any time soon.
"This inflation is genuinely gaining momentum and it becomes a little self-fulfilling," Toplis added.
The Reserve Bank aims to keep prices stable (between 1 and 3 percent) over the medium term. The official cash rate, which sat at a record-low 0.25 percent for 18 months, delivered stimulus to the economy during COVID-19. In October, the cash rate went up 25 basis points to 0.5 percent - the first rise in seven years.
Inflation happens when demand for goods and services is greater than supply. When supply drops or is constrained, a higher wholesale cash rate influences retail interest rates, helping to reduce demand.
Having previously forecasted a "pause" in April 2022, BNZ is forecasting a series of 25 basis point cash rate rises in November, February, April and May.
Before the September CPI announcement, BNZ forecasts showed around a 50 percent chance of a 50 basis point cash rate hike in November. Now, we're "right on the fence", Toplis said.
"If they raised rates by 50 basis points would it surprise us - no."
Kiwibank chief economist Jarrod Kerr confirmed the bank is forecasting a series of 25 basis point rises in November, February and May.
Due to the gap in monetary policy announcements between November and February, there's an increased chance of a 50 basis point rise in November. But the "considered steps" approach to delivery, outlined by RBNZ Assistant Governor Christian Hawkesby in September is likely to remain.
"We're still sticking with 25 [basis points] in November and the same forecast track… we've got a pretty aggressive move to 1.5 percent [by May]," Kerr said.
Some of the factors driving inflation are expected to be temporary. As the world gets back to a 'new normal', global supply-chain disruptions will be addressed, taking pressure off shipping costs. Opening up the economy will help to address labour shortages.
Kerr doesn't rule out further cash rate hikes from the middle of 2022, adding that there's "more of a risk" the Reserve Bank will have to tighten further.
"We're working off a low base from last year [quarterly CPI was 0.5 percent in December 2020]... we could easily see the annual inflation rate higher than 5 percent in the year to December," Kerr added.
Meanwhile, people needing certainty over what their mortgage payments will be could still refix their borrowing at "incredibly low rates", ASB senior economist Chris Tennent-Brown said.
On Tuesday, standard 2-year fixed mortgage rates offered by the leading five banks range from 3.45 percent to 4.05 percent, 3-year rates range from 3.69 to 4.50 percent. Variable (floating) rates range from 4 percent to 4.84 percent.
As a large percentage of borrowers have their lending on fixed mortgage rates, interest rate rises take time to filter through the economy.
But overall, borrowers do need to brace themselves for higher rates.
"The economy is producing all the signals that more are coming… the more the economy opens up, the more confident the Reserve Bank will be in the need to return rates to normal," Tennent-Brown added.
