Expect interest rates to rise this week

The still-buoyant housing market has most economists expecting Reserve Bank governor Alan Bollard will raise interest rates Thursday and they don’t think recent turmoil in international equity and currency markets will make any difference.

Sunday, March 4th 2007, 8:49PM

by Jenny Ruth

When Bollard last reviewed the official cash rate (OCR), currently 7.25%, he said that in order to avoid raising rates he would need to see “a return to a moderating trend in housing and domestic demand.”

The only economist out of 14 surveyed last week to think Bollard shouldn’t raise rates is Robin Clements at UBS New Zealand. Last week’s housing consents data, which showed a decline excluding consents for apartments, do suggest a moderation in housing.

“We do not see where the threat to the upper end of the medium-term inflation target will come from,” Clements says. Bollard is pledged to keep annual inflation, currently 2.6%, between zero and 3% over the medium term.

Other economists take a very contrary view: Daniel Wills as ASB Bank, for example, says that evidence of moderation in housing is “scant” with annual house price inflation holding around 10%.

Bank of New Zealand’s Craig Ebert is even suggesting that rather than a 25 basis point rise, Bollard should go 50 points to 7.75%.

“Failing that, there’s a better than even chance they will signal another one (hike). There’s a psychological aspect to this – they need to go far enough to get a reaction. They have to bring perceptions down to reality,” Ebert says.

If anything, last week’s decline in the New Zealand dollar should reinforce a decision to raise rates – the currency is now about 2% lower on a trade-weighted basis than when the OCR was last reviewed. A lower currency tends to raise inflation pressures since imports get more expensive and exporters’ get more New Zealand dollars for their goods and services.

Westpac chief economist Brendan O’Donovan says that although “headline” inflation is falling, Bollard is worried about medium term inflation exceeding his target.

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