Smokey-hot outlook for inflation

All eyes are on the RBNZ announcement at 2pm Wednesday afternoon.  It seems all but certain that the RBNZ will raise the OCR for the second time during the current lockdown.  It is now far less certain how big the increase will be.  The run of data has been relentlessly strong in showing sharply rising inflation pressures, and markets had started pricing in some chance of a 50bp hike.  Last week’s RBNZ survey of expectations showed a sharp rise in inflation expectations and has pushed market pricing to a 45% chance of a 50bp increase.  Whatever the outcome, financial markets will move.  

For the record, we expect a 25bp increase and some tough talk about rising inflation.  There is not much in it, but right now doesn’t seem the right time for a 50bp increase – despite the inflation signs.  They may sound like words from the bowels of an Auckland COVID bunker, and to some extent they are.  It’s literally going to be 3 and a half months between drinks for Auckland hospitality and other businesses that have been feeling prolonged pain.  Although a smaller OCR hike may not in itself make a material financial difference right now relative to a bigger one, this is a time when trying not to further dampen confidence is important.  Furthermore, we are heading into the unknowns of the Summer of COVID. It will take a little more time to know how well the health system copes and whether some winding back of new-found freedoms is needed – which has happened recently in Europe, for example.