No rate rise expected this week
Reserve Bank governor Alan Bollard is unlikely to hike rates on Thursday but nobody should be expecting any dovish words either.
Monday, October 22nd 2007, 9:16PM
by Jenny Ruth
Westpac chief economist Brendan O'Donovan says it's awkward in a public relations sense for Bollard to justify such tight monetary conditions when inflation came in at just 1.8% for the year ended September, well below his 3% upper limit.
But such low inflation was caused by one-off cuts to government charges. With factors such as the $3.6 billion in extra dairy cash, 2.2% of GDP on its own, and "a fiscal lolly scramble" heading into the next election next year, "we are expecting the economy to truck along quite nicely," O'Donovan says.
"A year ago, it was all about housing. Now, the inflation pressures are much more pervasive," he says.
"Even with the housing boom on its wobbly last legs, the Reserve Bank hasn't yet gotten inflation beat." Westpac is expecting further rate hikes in 2008.
Daniel Wills at ASB Bank says Bollard will be closely monitoring the sharp jump in global oil prices during the last few weeks which has the potential to significantly boost headline inflation next year. He isn't expecting any cuts to the OCR until late 2008.
Darren Gibbs at Deutsche Bank says that while Bollard is likely to acknowledge the recent softness in the housing market he is also likely to say that this will need to be sustained if the central bank is to reach its inflation target.
Macquarie Bank's economists note that one reason by the Reserve Bank decided to hold rates steady in September, rather than hike, was the high degree of uncertainty in the global outlook. "While conditions have improved, it is still unclear what financial distress means for global growth with the risks appearing to be on the downside."
ASB's Wills agrees. "A marked global slowdown would see the timing of OCR cuts brought forward. However, we emphasise that if it wasn't for this global risk, the Reserve Bank's risk assessment would still be leaning towards upside inflation risks."
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