Rate rise unlikely this week
Reserve Bank governor Alan Bollard is unlikely to hike rates on Thursday but, with inflation having breached Bollard's target range, the number of economists predicting future rate hikes is growing.
Sunday, January 20th 2008, 4:00PM
by Jenny Ruth
"Certainly OCR cuts look unlikely until early 2009 (barring a considerable down-leg in global growth) with a small probability of further Reserve Bank tightening over 2008," says ASB Bank economist Daniel Wills.
Figures released last week showed annual inflation at 3.2%, above the central bank's zero to 3% target. While one of Bollard's inflation bugbears, the housing market, is now trending down, "there is plenty to keep the Reserve Bank concerned regarding inflation," Wills says. With factors such as high global commodity prices and a tight labour market to take into account, he expects inflation will remain well above 3% at least until the end of 2008.
Westpac chief economist Brendan O'Donovan, who expects Bollard will have raise rates twice through 2008, says he expects the tone of the statement will be hawkish.
While high interest rates, high petrol prices and the housing market correction will be welcome signs for Bollard, "very strong wage growth, a wall of dairy cash and the carrot of tax cuts/fiscal stimulus" will be pushing in the opposite direction.
Darren Gibbs at Deutsche Bank says he expects Bollard's statement will "leave little doubt that, in the near-term at least, a further rate hike is significantly more likely than a rate cut."
But in the meantime, growth projections for major trading partners have been revised down and Gibbs expects them to be further revised down.
Bank of New Zealand chief economist Tony Alexander warns there's still a 25% chance Bollard will raise rates as early as Thursday, even though he isn't expecting it. That's because business surveys are showing worsening resource availability and rising expectations of cost and price increases, he says.
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