The Reserve Bank increased the Official Cash Rate (OCR) by 25 basis points to 3.00% as widely expected last Thursday. However it also made comment that the pace and extent of further OCR increases is likely to be more moderate relative to the track set in June.

The major banks have now changed tack with completely different expectations from their economists as to how the tightening cycle will track.

In ANZ Market Focus economists expect the Reserve Bank to deliver one more hike in September and then pause to assess the landscape. It believes the OCR will undoubtedly move up over time, with pauses on the way, as the Reserve Bank seeks to get rates closer to neutral.  

ANZ says one challenge a post-September pause faces is that it effectively rules out moving in October and December and re-starting the tightening cycle in January (an OCR Review date) is not ideal, effectively leaving March, which is a long time to pause with rates still well below neutral.

"But at this stage we're happy to run with that scenario, largely on a wider view of continued global ructions into 2011 as a wall of refinancing hits," says ANZ.

ASB Business Weekly says the June Monetary Policy Statement (MPS) had implied the OCR would eventually reach 5.75%, but its downward revisions now make its forecasts more realistic. ASB expects the OCR will be increased by 25 bp at each meeting until it reaches 5%.

"While we acknowledge there is a risk of a pause sometime this year, we remain wary of the upside risks to the Reserve Bank's inflation forecast."

BNZ Markets Outlook says if growth is heading to anything like "normal" the OCR must move back to neutral quickly alongside this.

It says there will in time be great debate about where the new neutral rate is, given the changed world of global banking.

"One thing is for sure, whether you're a pessimist or optimist, the neutral rate is hardly likely to have a 3 in front of it but more likely a 4 or even 5."

That is why BNZ believes a September rate hike should be a done deal and so too probably October if not December to boot.

Westpac Weekly Commentary analyses what a peak of 5% to the OCR would mean saying if 25bp hikes remain the norm, then it will take eight more moves to get from 3% to 5%.

"Even with no pauses that would take a full year and there will be a lot more information about the economy to assess along the way.

"For that reason we see little value in trying to predict the timing of any pauses within the cycle."

However its view remains that the Reserve Bank will continue to work its way to a peak of 6% by early 2012.

J P Morgan Weekly Prospects says owing to the fact that the Reserve Bank said current policy settings are supportive, it now expects only two more 25bp rate moves this year, compared to the three it had expected previously, with a likely pause in November.