Rate rise almost a dead cert

An interest rate rise this week is as much of a dead certainty as you can get in the money markets.

Monday, October 25th 2004, 11:56PM

by Jenny Ruth

Wholesale interest rate markets are fully pricing in a rate hike and economists agree that the Reserve Bank will raise its Official Cash Rate (OCR) from 6.25% to 6.5%.

Some economists see the risk of an even bigger hike along with further increases down the track. Macquarie Bank’s economists see a risk that the central bank may think the economy needs a stronger dose of monetary policy and will raise the OCR by 50 basis points to 6.75%.

Like other economists, they note that recent growth and inflation data slightly exceeded the Reserve Bank’s forecasts and that, with unemployment so low, it may be worried about wage inflation.

ASB Bank economist Kate Skinner says she doesn’t think the recent rise in the New Zealand dollar will have been sufficient to offset the stronger than expected data.

Westpac’s economists say two of the central bank’s moves this year – it has raised the OCR five times this year from 5% -- have effectively been undone by declining fixed rate mortgages, particularly two-year fixed mortgages, partly because of declining global wholesale interest rates and partly because of a battle for market share.

ANZ Bank says the market share war in the housing market must be causing the central bank consternation and that it won’t want to exacerbate that situation.

Nevertheless, Westpac’s and other economists are questioning whether the Reserve Bank needs to be so aggressive.

They think the bank may be overly worried about inflation, much of which has been due to rising house prices. "We expect interest rate cuts around mid-2005 as it becomes increasingly clear that the monetary policy brakes have been applied too hard."

« Confusion abounds on mortgage rates

OCR up to 6.50% »

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