Rates expected to remain the same before election

economists and the wholesale interest rates markets expect the Reserve Bank will leave interest rates unchanged when it releases its monetary policy statement on Thursday.

Monday, September 12th 2005, 12:57AM

by Jenny Ruth

The announcement is due just two days before the general election, although it may comment on the implications for inflation of politicians' spending promises.

A Bloomberg survey of 13 economists shows all expect the central bank to remain on hold.

Craig Ebert, an economist at Bank of New Zealand, says while there's a slight chance the bank will hike rates, the prospect of the election isn't stopping it.

"If the case was compelling enough, I don't think they would let an election stand in their way," he says.

Westpac economist Nick Tuffley points out that the central bank wasn't afraid to raise the official cash rate (OCR) 50 basis points to 5% on November 17, 1999, just days out from the last election.

However, there's no compelling case to raise rates this time around, even though it's clear that annual inflation will hit 3.5% or more in the short term, thanks to soaring oil prices, Tuffley says.

That's well above the Reserve Bank's zero to 3% target. But while higher transportation costs are likely to feed through into higher prices generally, "it's just going to add to the woes consumers are going to start experiencing."

Ebert says economic growth is already coming off the boil and that higher fuel prices are likely to increase the severity of the slow down. On the other hand, much of the fiscal stimulus put in train by the present government plus the promises of whichever party forms the next government have yet to take effect.

ASB Bank economist Kate Skinner agrees that the Reserve Bank is likely to remain of the view that growth will slow sufficiently to keep medium term inflation pressures contained. Nevertheless, she expects the central bank's latest forecasts will show annual inflation above 3% for at least four quarters which should keep it on the hawkish side.

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