Most economists expect no OCR change

There’s little chance the Reserve Bank will raise interest rates again this week when it reviews its Official Cash Rate (OCR), although most economists still think rates will rise further next year.

The bank last raised the OCR in July and has lifted it from 4.75% to 5.75% so far this year.

The Reserve Bank is likely to opt for the status quo, "if for no other reason than the added flexibility the Reserve Bank has with the new target," says David Drage, chief economist at ANZ Bank.

The government’s agreement with newly appointed Reserve Bank governor Alan Bollard changed the inflation target from zero to 3% to between 1% and 3%. It also allows the bank to aim to achieve that "over the medium term," rather than in the space of one year as the previous agreement did.

The "on hold" view is despite last week’s figures showing the economy expanded 1.7% in the June quarter which annualised comes to a hectic almost 7%, although many of the contributors to growth, notably the dairy sector, were already slowing.

"We still remain cautiously optimistic about the prospects for growth, although undoubtedly the performance will be more modest in the second half of this year," Drage says.

He sees considerable momentum in the domestic economy, not least from continuing positive net migration. New Zealand is gaining a little over 3,500 new residents a month at the moment, he says. That meant net migrant transfers of $420 million in the June quarter and more than $1.5 billion in the year ended June which undoubtedly one reason Auckland house prices and activity has been rising lately.

While the big risk is what happens in the global economy and the risk of war in the Middle East.

JB Were economist Bernard Doyle takes a contrary view to the mainstream, expecting the Reserve Bank will be cutting rates by this time next year, if not earlier

The growth figures were only of historical interest. Forward indicators, particularly business confidence, are in negative territory, although the latter did rebound somewhat this month. A net 21% of businesses now expect general business conditions to deteriorate over the coming year, but that’s an improvement on the net 31% of pessimists in August.

"It was a decent rebound. We were thinking if it didn’t rebound, we were looking at the distinct possibility of a rate cut before Christmas," Doyle says.

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