OCR unlikely to change this week but future murky

The market concensus is that Reserve Bank governor Don Brash won’t change his official cash rate (OCR) when he reviews it on Wednesday, but beyond that, there’s anything but concensus.

Monday, January 21st 2002, 5:10PM

by Jenny Ruth

Brash’s last move was back in mid-November when he cut the OCR, which determines the level of floating rate mortgages, from 5.25% to 4.75%.

Grappling with the same set of economic figures, economists are coming to vastly different conclusions about where the New Zealand and global economies are headed and therefore the likely path of interest rates.

National Bank senior economist Cameron Bagrie’s crystal ball is showing a decidedly murky picture. "There is a higher than normal degree of uncertainty over where to from here and risks are skewed to the downside,'’ he reckons.

While the domestic economy is chugging along quite nicely, "New Zealand cannot hide from the weak global scene," he says. Particularly worrying Bagrie are the fallout from the collapse of US energy trading company Enron and the parlous states of the Argentinian and Japanese economies.

Enron, the Houston-based energy trading company with ties to President Bush and other Republicans, collapsed last year in the biggest bankruptcy filing in US history.

Argentina has defaulted on its international debt and has been forced to decouple its peso from the US dollar while Japan remains perpetually mired in recession.

But for Bank of New Zealand economists, last week’s "stunning" retail sales figures suggest the New Zealand economy has more momentum than previously thought. Retail sales rose 1.7% in November from October and were 7.8% higher than in November last year.

"The rampant spending pace not only extinguishes any last gasp hope of further interest rate cuts, but brings a sharper focus on when the Reserve Bank might be tightening," the BNZ economists say.

HSBC economists agree. "Any doubts about the likely resilience of the New Zealand economy should have been quashed" by the retail sales figures, they say.

While there’s a risk that a weakening jobs market may dent consumer spending in the months ahead, low interest rates, the strength in the housing market and signs of a recovery in the US economy should all underpin the New Zealand economy, they say.

But Deutsche Bank senior economist Darren Gibbs says that although the retail sales figures are backed up by favourable anecdotal evidence, the November rise followed three months of broadly stable sales figures. "We think that there was an element of catch-up spending."

Gibbs reckons Brash will hesitate "to take back quickly last year’s `insurance’ easing." He is predicting Brash won’t begin raising rates again until the September quarter.

Macquarie Bank says the tone of Brash’s statement on Wedesday will be all important, "whether or not the Reserve Bank reverts to a more hawkish stance." It expects Brash will be inclined to be relatively balanced, given the economy grew less than expected in the September quarter and weakness in the jobs market.

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