No OCR cut on horizon

Expectations of an interest rate cut have been dashed by this morning’s official cash rate (OCR) announcement.

Thursday, December 6th 2012, 10:40AM

by Susan Edmunds

The rate was kept at 2.5%, as economists had predicted. But before the announcement, economists said it was becoming increasingly likely that the rate could be cut, due to rising unemployment, a high dollar and low inflation. But Reserve Bank governor Graeme Wheeler said there were enough positive signs on the horizon to counter those factors. “Over the next two years, growth is expected to accelerate to between 2.5% and 3% per annum.”

He said the global outlook was now less threatening than it was earlier in the year. “The risk of severe near-term deterioration in the euro area has decreased and Chinese economic indicators have been more positive recently.” Wheeler said the Christchurch rebuild and Auckland’s strong housing market would put upward pressure on inflation. “The overall outlook is for stronger domestic demand and the elimination of current excess capacity by the end of next year. This is expected to cause inflation to rise gradually towards the 2% target midpoint.”

Westpac chief economist Dominick Stephens said it was clear the next move from the Reserve Bank would be to increase the rate. “The interesting bit was the balance of risks. He stuck to the view that house price inflation will moderate.” He said if that didn’t happen, the OCR would have to be increased sooner and further. Stephens said he predicted house prices would remain buoyant and the OCR would go up in September 2013, not 2014 as Wheeler has indicated.

ANZ chief economist Cameron Bagrie agreed rates were not going to be cut soon. “Right here and now it’s steady as she goes.” Mark Lister, of Craigs investment Partners, said Wheeler had sounded a bit more upbeat than some had expected. He said it was not surprising that the dollar had lifted slightly in response. “The market sees the potential for them to have to look at an increase if things stay strong.”

Lister said it would likely mean more of the same for home loan rates, although they could increase marginally, as the prospect of rate cuts was eliminated.

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