Close call whether rates will rise

Whether or not Reserve Bank governor Alan Bollard decides to hike interest rates on Thursday appears to be a finely balanced decision, but a slim majority of economists now think he will.

Monday, October 23rd 2006, 8:15PM

by Jenny Ruth

Late last week, eight out of 14 economists surveyed by Reuters were picking a rate hike. You could say that the economists were starting to come into line with the wholesale interest rates market which rate the chances of a rate rise much more highly. The 90-day bank bill futures contracts are trading at about 7.75% through until the September 2007 contract which is trading at 7.5%.

ASB Bank economist Daniel Wills is among those expecting Bollard to lift the OCR 25 points to 7.50%, although he says it will be a close call. "An October rate hike is the RBNZ’s opportunity to reinforce moderation in domestic spending and inflation," he says.

The outlook, particularly for the housing and labour markets and the current intense mortgage rate competition and increasing pressure for tax cuts "do not augur well for medium term inflation pressures."

Macquarie Bank’s economists think that domestic demand was sufficiently weak in the second quarter to allow Bollard to stay his hand.

Craig Ebert at Bank of New Zealand says that while there’s a strong case for raising rates, Bollard could feel justified in buying more time.

"Given any other governor, or even a committee, we’d be leaning on the side of a rate hike along with the majority of others," Ebert says. But given Bollard’s track record, he might decide that although recent data has been robust, it hasn’t contained any genuine upside surprises,” he says.

A key decider could be Wednesday’s release of the September quarter consumer price index.

The market is picking annual inflation will drop from 4% to 3.6%. Bollard is pledged to keep inflation between zero and 3% over the medium term.

« Pressure forces rates up

OCR remains the same »

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