Bollard to hold OCR unchanged

Reserve Bank Governor Alan Bollard will hold the official cash rate at a record-low 2.5% next week, economists say, with all eyes on the wording he uses for the timing of the resumption of interest rate hikes.

Friday, April 23rd 2010, 10:04AM

by BusinessDesk

Economists can't forecast the wording numerically and they're split on whether Bollard moves in June or July. Economic figures show a tepid economy, with inflation running a tad cooler than market expectations and consumer activity quiet. Officially, he will move ‘mid-year.'

The OCR is expected to push through 5% in the looming tightening cycle, which will squeeze mortgage holders on floating or short-term loans. Consumers have felt poor as unemployment climbed above 7% and the value of their biggest asset, a home with mortgage, stagnated. Against that, gauges of manufacturing and services industry activity have strengthened and inventories have been trimmed, suggesting at least some engines of growth are in place.

"Make no mistake, the days of a 2.5% cash rate are numbered," Brendan O'Donovan, chief economist at Westpac Banking Corp., said in a note yesterday. "Our view is that the first hike will come with the June MPS - accompanied by a set of forecasts to justify the move."

Westpac predicts a more hawkish set of forecasts could drive the kiwi dollar up against its Australian counterpart, as "the perception that New Zealand is Australia's slow cousin is rampant in financial markets."

The kiwi has fallen almost 8% against Australia's dollar from its early October peak of more than 83 Australian cents. It was recently at 76.74 Australian cents.

Investors gain only a snippet of insight from the central bank next week, with the abbreviated release sometimes running to as little as a few paragraphs.

Bollard, who typically doesn't attend or answer questions on OCR reviews that fall outside his full quarterly statements, is likely to put investors on notice that a rate hike could be imminent, said Deutsche Bank chief economist Darren Gibbs.

Bollard's language may "indicate that, for the first time, all subsequent meetings should be regarded as ‘live' as far as beginning the process of policy normalisation is concerned," Gibbs said. The exact timing would be dependent on the economy's health.

Clues to the timing of normalcy returning for consumers came with this month's ANZ Roy Morgan Consumer Confidence survey, out yesterday, which showed confidence edged up 0.1 points to 121.9 this month.

That constitutes a "broadly healthy" level, the survey's authors said. In addition, the gap between ‘current conditions' and ‘future conditions' has widened, as New Zealanders become more optimistic about the future while seeing rain clouds today.

Looming large is Finance Minister Bill English's Budget next month, which may put public servants on an austerity drive and contain the detail of tax reform, including erosion of benefits for property investors. Bollard has previously said government fiscal policy that wasn't too stimulatory was preferred.

English said yesterday that the tax package to be unveiled in the May 20 Budget would be broadly fiscally neutral - giving away and raising taxes in equal measure - but over an extended period of four or five years.

The government is adding another $1.8 billion in spending cuts to the $2 billion already announced, over the next four years to help get New Zealand back into surplus, he said.

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Bollard to hold OCR amid faltering retail spending and housing market »

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