Interest rate hike expected but is this really the right time?

Economists expect the Reserve Bank to increase the official cash rate this week - but one is asking now is really the right time to do so.Jarrod Kerr, chief economist at Kiwibank, said he expected the OCR to increase from 2.5 percent to 2.75 percent, but thought it was not the correct decision.He said while exporters had been buoyed by strong commodity prices and demand from overseas trading partners, it had not translated into domestic demand or wage growth for regular New Zealanders.Households were facing price increases in food, electricity, rates and insurance and incomes were not keeping up with the cost of essentials.Businesses were struggling with what to do about their rising costs because their customers did not have space to absorb them."There's what we think they will do and there's what we think they should do and they're different things at this point in time."I don't think we need to jump at shadows here. I don't think we need to get panicked about medium-term inflation expectations… businesses are trying top pass on costs and they can't. Households are facing higher costs, they're struggling. The data that we got last week showed households are spending more but they're getting less.Economists expect the Reserve Bank to increase the official cash rate this week.RNZ"I don't think firms are expanding their margins. I think this is very much a case of costs going up and I think they'll settle back down next year. The thing you get worried about is if there's going to be a wage-price spiral, so you get a surge in inflation then employees demand more pay and that gets passed on and you get these second-round effects. That's not now. Not now at all. The labour market is really weak. Wage growth is just 2 percent below inflation."He said the Reserve Bank would be better to wait and hike next year.At that point it would be increasing rates for the right reasons, when there was some growth and recovery. "We haven't seen the recovery yet and growth is still way, way below potential."BNZ chief economist Mike Jones said it was important to recognise that the Reserve Bank was in the process of reducing monetary stimulus, rather than actively putting the brakes on growth."People debate where exactly 'neutral' for the cash rate is, but it seems safe to say that it will still be below neutral - i.e. stimulatory - even if it is lifted to 2.75 percent this week as we expect."It's also noteworthy that a 25bps hike is widely expected. It's an outcome priced into financial markets with a near 95% probability. So the delivery of cash rate lift wouldn't necessarily be expected to lift market interest rates noticeably, other than floating rates. These expectations also mean that, if the Reserve Bank didn't follow through with a hike this week, financial conditions would ease, something that would probably be viewed as undesirable given the inflation outlook. Our forecasts have inflation remaining above the target band until the second quarter of 2027."Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make and spend money.