Rates rise tipped for Wednesday

Almost all economists and the money market expect the Reserve Bank will raise interest rates again on Wednesday, but there’s an outside chance it won’t.

A Reuters poll of 12 economists conducted last week found 11 are expecting the Official Cash Rate (OCR) to rise from 5.5% to 5.75% which is the increase the market is expecting.

The 90-day bank bills finished trading last week at 5.98%, suggesting the market is not only betting on a 25 basis point increase, but also on a further 25 point increase after that.

Bernard Doyle of JB Were is the one economist who is punting on the bank leaving rates unchanged.

"While a 25 point rise is defensible, we suspect the Reserve Bank will choose to sit back until August," he says.

One reason for this view is the sharp rise in the New Zealand dollar since the bank last raised rates on May 15. That means cheaper imports, so less inflation, and lower returns to exporters, so lower growth.

And back then, the markets were expecting the US Federal Reserve to start raising interest rates in August. Now the markets don’t expect the Fed to move till late this year.

"The Reserve Bank could be opening a yawning interest rate differential that may exacerbate the recent sharp currency appreciation," Doyle says.

As well, the housing market may be buoyant but it hasn’t yet reached bubble status. "House price appreciation pales in comparison to the UK, Australia and, to a lesser extent, the US," he says.

And then there’s politics: "The current (and likely future) finance minister (Michael Cullen) has made it clear he wants a more passive approach to monetary policy," Doyle says.

Darren Gibbs, senior economist at Deutsche Bank, rates it a 40% chance that the central bank will stay its hand, also suggesting doing nothing could defuse Cullen’s recent criticism. But he thinks a 25 point rise is more likely. An OCR at 5.75% would mean monetary conditions are no tighter than neutral, he says.

What is less clear is what will happen to mortgage rates if the bank does raise rates. The five major home lenders’ floating rates are currently 7.75%. Traditionally, floating mortgages are priced between 150 and 200 basis points higher than the 90-day bank bill rate.

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