Economists say interest rates will be left unchanged

Despite Reserve Bank governor Alan Bollard's hawkish words threatening a further rate cut when he last reviewed interest rates in late April, a message reinforced in two subsequent speeches, economists expected him to leave rates unchanged on Thursday.

Monday, June 6th 2005, 9:54PM

by Jenny Ruth

A Reuters poll of 14 economists showed none are expecting Bollard to raise his benchmark official cash rate (OCR), although they don't entirely rule out the possibility. They give a 75% probability to Bollard doing nothing and a 25% likelihood he will put the OCR up from its current 6.75% level.

Bollard probably won't like the fact that one of the economists is forecasting rate cuts in the December and March 2006 quarters and that nine of the others are predicting a rate cut in the March 2006 quarter.

As Kate Skinner, an economist at ASB Bank, notes, "the Reserve Bank has gone to great lengths to prepare the market for the possibility that it may deliver a rate hike on June 9 and to deter it from pricing in rate cuts."

But the market appears to be ignoring that warning and has fully priced in a rate cut by next January. Westpac's economists say the biggest reason why the central bank shouldn't raise interest rates is that business confidence fell to a 17-year low in May.

Another reason is that housing consents plummeted 33.9% in April in seasonally adjusted terms.

"Both business confidence and dwelling consent issuance have fallen to a level that the Reserve Bank cannot fail to see weakness in," Westpac's economists say.

BNZ chief economist Tony Alexander isn't so sure the central bank will be convinced by the business confidence survey. He notes that lending to all sectors of the economy remains strong.

“We suspect discontent with the government and this being an election year is a big reason for a large disconnect between survey results and reality," Alexander says.

Yet another factor likely to disturb Bollard is that an international rally in interest rate markets has driven wholesale interest rates down. In particular, the three-year swap rate, from which three-year fixed rate mortgages are priced, has dropped to 6.58%, its lowest level since December and down from 6.74% a week ago.

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