An independent economist believes the Reserve Bank has already accounted for Labour’s spending in the Budget and isn’t predicting a major hike to the Official Cash Rate (OCR).
The Government released its Budget last week, which economists warn could stoke inflation and mean mortgage rates are pushed high for longer.
But Finance Minister Grant Robertson assures Kiwis the Budget is well prepared and won’t stoke inflation.
The Reserve Bank will announce its latest update to the OCR at 2pm on Wednesday.
Despite many experts predicting a major hike to the OCR, economist Tony Alexander told AM on Wednesday he only expects a rise of 25bp.
“I actually think the Reserve Bank Governor got some pre-venge in back on April 5 when he increased by 0.50 percent and not the 0.25 percent we were expecting,” Alexander told AM co-host Ryan Bridge.
“I’d say he was already getting in, ahead of an expectation there will be some loosening in a Labour government election year budget. It was sort of a no-brainer really.”
With so many Kiwis needing to refix their mortgages this year, Alexander believes the Reserve Bank will take this into account with a smaller hike.
“Monetary policy doesn’t act immediately, it takes sort of 18 months plus and they’ll be aware there’s quite a restraining impact on the economy to come from almost $170 billion worth of mortgages rolling into higher fixed rates, people are increasing about 3 percent or so,” he said.
“So they may actually not want to aggravate what is already going to flow through the system, hence probably a 25 point increase, but if they go 50, maybe that’s the end of the cycle. We simply have to see.”
The OCR has been on a rapid rise over the last two years, going from 0.25 percent in August 2021 to the current rate of 5.25 percent as the Reserve Bank tries to bring spiralling inflation – sitting at 6.7 percent – under control.
Many thought April’s hike could’ve been the last, but it looks like there will be another increase on Wednesday. But Alexander added we are “very close” to the end of the cycle.
“We can see some of the inflation indicators are coming off, but not at a fast enough pace for the Reserve Bank to say, ‘yup, it’s looking sweet, you can anticipate lower interest rates’. I think we’re many months away from that,” he said.
Watch the full interview with Tony Alexander in the video above.