RBNZ to raise OCR to counter galloping inflation

RBNZ to raise OCR to counter galloping inflation expectations: Moody's

July 27 (BusinessDesk) - 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.

(BusinessDesk)

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