Economists predicts rates to be held

Most economists are expecting the Reserve Bank to hold interest rates steady when it releases its next monetary policy statement on Thursday but governor Alan Bollard’s comments are likely to be on the hawkish side.

Monday, June 4th 2007, 3:01PM

by Jenny Ruth

Of the 16 economists surveyed by Reuters, only three are expecting Bollard to raise his official cash rate (OCR) from its current 7.75% level and the rest expect him to hold at that level.

However, the wholesale markets are pricing in a slightly better than even chance of a rate rise.

Stephen Toplis, an economist at Bank of New Zealand, is one of those picking a rate hike, despite the surprisingly weak National Bank survey of business opinion released last week.

"Try as we might, we find ourselves transfixed by both data and anecdote that tells us the economy is simply speeding out of control," Toplis says.

He cites strong consumer spending, continued double digit house price growth, government spending and the "massive terms of trade shock" from surging dairy prices as reasons for Bollard to raise rates.

Daniel Wills, an economist at ASB Bank, isn’t ruling out further rate rises later this year, but says that the two rate rises Bollard has made already this year should prove sufficient to moderate domestic spending pressures.

"Domestic demand and housing data will remain the key focus for the bank over coming months," Wills says. "Sharply higher mortgage rates are expected to moderating the housing market in particular, and with it domestic spending momentum."

Darren Gibbs at Deutsche Bank also views further rate hikes as possible, although not this week. "We expect the tone to be very hawkish – we see little reason why it would be otherwise."

Gibbs says the rise in Fonterra’s forecast dairy payout implies a boost to dairy farm incomes of up to $1.6 billion.

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