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Shadow board says Reserve Bank should prepare market for future hikes

Reserve Bank governor Graeme Wheeler is widely expected to leave the OCR unchanged, with all eyes on what he says about the future path for the benchmark interest rate.

A group of economists and business leaders says the Reserve Bank should signal that interest rate increases are coming down the track.

A poll of the New Zealand Institute of Economic Research's monetary police shadow board found concluded that the Reserve Bank should leave the official cash rate at 1.75 per cent.

But the shadow board found that the "ideal" OCR was marginally higher - at 1.79 per cent - and while there was no need for a speedy increase, several members said the bank should be preparing the market for future increases.

Motu senior research fellow, Arthur Grimes.

Former Reserve Bank chairman Arthur Grimes, a research fellow at think tank Motu, said inflation was now "comfortably" within the 1-3 per cent target range, meaning there was no need for the central bank to move quickly.

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But Grimes said the bank could lay the groundwork for future hikes.

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"Longer term, a rise in interest rates from current low levels will be required, and it would be useful to start conditioning expectations of a future increase."

Grimes, along with BusinessNZ chief executive Kirk Hope and Kiwibank chief economist Zoe Wallis all marginally increased what they believed the recommended OCR should be.

Carolyn Luey, general manager of MYOB was the only member of the shadow board to imply her view of the ideal OCR was lower than it was at the start of February.

"Borrowing costs for SMEs are starting to rise as banks pass on lending costs, plus dairy prices have dipped," Luey said.

All of the major bank economists have formally predicted no change in the OCR, with the market saying there is a less than 50 per cent chance the central bank will hike interest rates by Christmas.

Stuff

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