Are oil price hikes putting a pre-election OCR increase back in play?

Recent spikes in global oil prices and bond yields appear to be increasing the possibility the Reserve Bank will need to hike the Official Cash Rate again in October.While the Bank hiked the OCR earlier this month by 0.25 percent, to 2.75 percent, financial markets interpreted the commentary associated with the increase as dovish, with a pause in hikes in October looking likely.The Reserve Bank is due to review the OCR again on October 28, just over a week before the election on November 7.But the BNZ Economics team said in a research update today that the outlook has shifted."Things can change very quickly in this zany world that we now live in. The last few days have been a case in point with oil prices soaring, bond yields rising aggressively, central banks looking increasingly likely to push rates higher, the New Zealand dollar falling and, as a wee counterpoint to the unfortunate developments, New Zealand growth aggregates showing remarkable resilience," BNZ said.Oil prices surged back over US$100 (NZ$172) a barrel last week on renewed fighting between Iran and the US and growing concern about the disruption to the Red Sea oil route from Houthi rebels.The research note went on to say that a few days back, markets were pricing in little chance of a rate hike in October and almost no chance of two before the end of the year."Now, there's a near two-thirds chance of a hike priced for the first meeting and around an even chance of two rate hikes," BNZ said.BNZ said it thinks the market assessment is entirely apt, pointing out that when the Reserve Bank put together its September Monetary Policy Statement it assumed the Dubai crude oil price would average US$83.70 (NZ$144.66) across the September quarter, falling to US$78.40 (NZ$135.50) in a year's time.The economists note that the crude price is almost 17 percent higher than had been assumed for the next quarter and, in addition, the NZD on the trade-weighted index is currently sitting at 65.4 compared with a 66.9 estimate.They say this not only puts further upward pressure on domestic fuel prices, but also on imported inflation generally.BNZ said the full impact of the recently elevated oil prices will be a big shock to the fourth-quarter inflation reading.It said this could now end up at a 4.2 percent annual rate, some 0.3 percent above the Bank's estimate.