No rate rise expected this week

Economists are unanimous that Reserve Bank governor Alan Bollard will leave interest rates unchanged when he reviews his official cash rate on Thursday; the only debate is how hawkish his comments will be.

Monday, July 25th 2005, 1:26AM

by Jenny Ruth

The 14 economists in Reuters' latest survey are all saying there won't be any change and collectively they rate the chance of an OCR hike from its current 6.75% level at just 20%.

This is greater than current pricing in the wholesale interest rate market that implies less than a 10% chance of a 25 basis point hike. The economists are also unanimous that the OCR will be left at its current level through to the end of December.

After that, their views polarise with nine of them expecting a rate cut by the end of March next year while the other five expect the OCR will remain at 6.75%.

Deutsche Bank economist Darren Gibbs says although he thinks Bollard will hold the OCR steady, the decision not to raise rates is a closer call than the market thinks.

There's an ingrained belief in the market that the economy is slowing rapidly and that this will contain inflation, he says. That's even though the domestic economy and inflation pressures have been stronger over the past 12 months despite monetary conditions tightening more than expected.

He notes that the June monetary policy statement's projections allowed for a further rate hike even if the economy performed in line with the central bank's expectations.

With the likely general election date September 17, Bollard will be uncomfortable with the possibility that he may have to raise rates when he releases his next statement on September 15.

Gibbs also notes that although GDP figures in the March quarter undershot the Reserve Bank's expectations for the third successive quarter, indicators of excess demand pressures have shown only a small degree of slackening "and, in all cases, remain close to historic highs."

He also says that despite headline annual inflation being unchanged in the June quarter, underlying inflation seems greater than expected.

While other economists take heart from the fact that retail sales in May fell 0.6% from April, Gibbs says they were still up 7% from May last year. And Quotable Value figures showed house prices rose "an eye-popping" 5.2% in the June quarter.

Gibbs also points to the recent decline in the New Zealand dollar and the likelihood of increased government spending or tax cuts as adding to the pressure for a rate hike.

At the other end of the spectrum, Westpac chief economist Brendan O'Donovan thinks the central bank's forecasts on immigration and residential construction are too optimistic and that if it hadn't been for the mortgage interest rate war late last year, the housing market would be considerably weaker.

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