The whole cash rate will go up this week, economists say, pointing to the need for interest rate hikes to control inflation despite disruption caused by the Omicron outbreak.
Having sat at a record-low 0.25 percent for over 18 months, the official cash rate went up by 25 basis points in October and November 2021. It is currently 0.75 percent.
ANZ and Kiwibank economists expect the Reserve Bank to hike the official cash rate (OCR) by another 25 basis points on Wednesday, taking it to 1 percent.
Both banks also expect the Reserve Bank to hike the OCR "at every opportunity", which would amount to seven rate rises this year.
In April next year, the cash rate will be 3 percent, ANZ's forecast shows. Kiwibank's forecast to the end of November, shows a cash rate of 2.5 percent.
Reserve Bank monetary policy aims to keep annual inflation between 1 and 3 percent over the medium-term, and supports 'maximum sustainable employment'.
StatsNZ Consumer Price Index figures show inflation, currently 5.9 percent, is at a three-decade high. ANZ forecasts show inflation will peak around 6.4 percent over the first quarter of this year.
Asked whether the Omicron outbreak is likely to force the Reserve Bank to halt further cash rate hikes, ANZ economist Finn Robinson told Newshub inflation pressures are too high to be ignored.
"The RBNZ is now facing a difficult situation where risks to growth are to the downside, but underlying inflation pressures are too strong," Robinson said.
Unemployment is at a record-low 3.2 percent. National demand for labour is expected to continue through the year, even as New Zealand's staged COVID-19 border reopening brings new workers into the country.
"Demand for labour is also much stronger than labour supply right now. And that means we’re likely to see a lot of inflation pressure coming from the labour market over the next year or so," Robinson told Newshub.
The Omicron outbreak is causing disruption in the economy, with the number of new infections reaching 2365 on Monday, down from a record-high of 2522 on Sunday.
At Monday's press conference, at which the COVID-19 Support Payment was announced, Finance Minister Grant Roberston quoted current retail card spending figures, which showed spending on food and beverages was down 27 percent compared to the same week in 2020.
Art and recreation services spending was down 47 percent, while spending on accommodation services was down 59 percent.
Kiwibank chief economist Jarrod Kerr said the bank's card data shows spending at restaurants, bars and cafes, along with amusement parks and sporting events, remains "well below normal".
While Kerr doubts the Omicron outbreak will be enough to deter the Reserve Bank from lifting the cash rate higher, he doesn't expect it to go higher than 1 percent on Wednesday.
"I don’t think the RBNZ needs to hike 50bps at this meeting. We’re in the middle of an Omicron outbreak, the housing market has turned, and there are businesses doing it tough in the CBDs in particular," Kerr said.
Bank card spending figures from previous COVID-19 lockdowns show spending rebounds as restrictions ease.
Following the 2021 COVID-19 lockdown, which started in August, Kiwibank card data shows a "sharp upswing" in consumer spending, including on online purchases, which were significantly higher than in 2019 and 2020. From November, there was a spike in spending on home building and renovations.
Referring to COVID-19 as a "supply shock", Robinson said ultimately, it means inflation gets worse and economic activity is constrained.
"In that situation, central banks have to make the hard decision to bring inflation under control - even if it means slowing the economy down," Robinson said.
Fixed mortgage interest rates have continued to push higher. Standard two-year fixed rates across the main five banks on Monday, range from 4.35 percent to 5.20 percent. Three-year fixed rates range from 4.65 percent to 5.54 percent.
Standard floating (variable) mortgage rates, more readily affected by movements in the OCR, range from 4.25 percent to 5.09 percent.
While markets have largely priced in cash rate rate rises, assuming the OCR moves up 25 basis points on Wednesday, Kerr expects to see some pass through to fixed mortgage rates.
New borrowers, and those coming off lower fixed interest rates, would be wise to factor in slight rises to existing fixed mortgage rates, in the vicinity of 10 and 25 basis points.
The Reserve Bank will deliver the first Monetary Policy Statement of the year on Wednesday.
