Interest rates likely to rise

Economists are unusually unanimous: they expect the Reserve Bank to raise its official cash rate (OCR) from 6% to 6.25%, the fifth rate hike this year, when it releases its latest monetary policy statement.

Tuesday, September 7th 2004, 12:43AM

by Jenny Ruth

A Reuters poll of 14 economists found all 14 are expecting a rate rise on Thursday and that nine of them expect another rise to take the OCR to 6.5% before the end of this year. The OCR, which the pricing of floating mortgage rates, started the year at 5%.

ANZ Bank’s economists say they expect central bank governor Alan Bollard’s tone will be hawkish.

"Partial indicators suggest the economy continued apace following the stellar GDP result recorded in the March quarter," ANZ says. But there are signs the housing market, a key source of inflationary pressures, is starting to slow.

ANZ says the wholesale interest rates market has fully priced in a 25 basis points rate rise on Thursday and rates the chances of a further rise in October at 60%.

But Westpac’s economists say Thursday’s increase may be the last of the current cycle. "Short-term inflation concerns are still receiving greater weight than the risk of monetary policy exacerbating slower 2005 growth," they say. "But the point is nearing where interest rates will stop going up."

Deutsche Bank chief economist Ulf Schoefisch agrees with ANZ that Bollard will "talk tough," but he also thinks this week’s OCR rise may be the last – he rates the chances of another increase at only 40%.

His view is that, since the last OCR rise in late July, most of the economic data has pointed to cooling demand. This includes soft net immigration, housing market figures and soaring international oil prices.

"We expect demand data to remain relatively soft over the next two months and the New Zealand dollar to remain firm," Schoefisch says. He also notes that the main impact of the rate rises already implemented this year will only be felt during the next six months as fixed-rate mortgages expire.

But Bank of New Zealand’s economists say there are few signs yet that the economy will slow sufficiently to keep inflation under control.

They are among the most hawkish, rating it a 40% chance that the OCR will rise to 6.75% by the end of this year and a 20% chance that it could eventually peak at 7%.

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