Rate rise this week unlikely

Good Returns survey of economists show a rise in the official cash rate is unlikely this week.

Sunday, December 2nd 2007, 9:07PM

by Jenny Ruth

Strong inflation pressures and the buoyant labour market should be offset by the slowing housing market and the global credit crisis, allowing Reserve Bank governor Alan Bollard to leave interest rates unchanged this week.

All 10 of the economists Good Returns surveyed last week expect no change to the current 8.25% official cash rate (OCR) with probabilities ranging from 80% through to 99.9%.

Darren Gibbs at Deutsche Bank is of the latter view. He says since the last OCR review in October, when Bollard left rates unchanged, the flow of data is unlikely to have changed Bollard's views sufficiently to warrant changing the OCR.

While the near-term inflation outlook has deteriorated slightly due to rising food and energy prices and the labour market has tightened further, "the news in the housing sector remains unambiguously soft," Gibbs says.

House sales in September and October were down about 25% to 30% from a year earlier. Global growth projections for New Zealand's key trading partners have also been revised down slightly over the past month, he says.

Westpac chief economist Brendan O'Donovan says that Bollard is between a rock and a hard place, with inflation pressures building rapidly.

"At the same time though, global financial markets are looking decidedly dodgy, a fact that poses a grave risk for New Zealand's economic prospects," O'Donovan says. "This threat will again keep the Reserve Bank from pulling the trigger this month."

Daniel Wills at ASB Bank says that while Bollard will be more nervous about inflation in 2008, he will also be increasingly wary of US economic risks.

"Recent weeks have brought further indications that the US housing market is continuing a sharp slide," Wills says, adding that decline was already entrenched before the recent tightening of credit standards.

"US investment banks are now starting to reveal some large trading losses and a swing to bringing loans back onto banks' balance sheets will further constrain the US financial system's ability to lend."

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