Chances of rate rise increasing

Economists are divided as to whether the Reserve Bank will raise interest rates on Thursday with a narrow majority expecting no change.

Monday, March 7th 2005, 6:19AM

by Jenny Ruth

The latest Reuters survey shows eight of 14 economists expect no change to the official cash rate (OCR), currently a 6.5%, but six expect Reserve Bank governor Alan Bollard will raise the rate to 6.75%.

ANZ/National Bank recently changed its view and is now expecting a rate hike on Thursday and is also predicting a further increase in April. Economist Cameron Bagrie says the change of mind came when the bank updated its quarterly economic forecasts.

"We were nervous. When we went through this forecasting round it became blatantly clear just how persistent inflation is," Bagrie says.

"Our suspicion is that the Reserve Bank’s patience has run out." Inflation in calendar 2004 was 2.7% and ANZ/National is forecasting it will breach the central bank’s 3% upper limit this year.

It expects the economy will stay stronger than it expected for longer than it expected, exacerbating labour constraints and potentially increasing wage inflation.

But if events pan out as it expects, its outlook for 2006 is gloomy, rather than the soft landing most would prefer. "Business cycles seldom die – they are either murdered by bad policy or a major event."

Westpac’s economists are among those expecting Bollard to stay his hand, although only just, mainly because the currency remains so strong.

"The Reserve Bank would be happier with an OCR above 7% rather than 6.5%, but not with a currently through 70 on a trade weighted index basis," Westpac chief economist Brendan O’Donovan says.

"The New Zealand dollar has recently scaled a peak that would make even Sir Edmund Hillary’s eyebrows rise," he says, noting that it has resumed its upward trend recently.

O'Donovan says the wholesale interest rates market is pricing in a 40% chance of a rate hike and a 60% chance of the OCR reaching 6.75% in coming months.

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