Bollard to hold OCR amid faltering retail spending and housing market

With retail spending and the housing market faltering and domestic inflation running below the Reserve Bank's expectations, governor Alan Bollard is likely to leave interest rates unchanged at record lows next week but everybody is expecting a hike soon.

Monday, April 26th 2010, 1:18PM

by Jenny Ruth

A GoodReturns survey of 12 economists showed all are expecting Bollard to leave his official cash rate (OCR) unchanged at 2.5%. The big division of opinion is whether Bollard will start raising the OCR in June or July.

Currently wholesale interest markets are pricing in only about a 40% chance of a June hike but the weight of opinion among economists is picking the OCR will rise in June.

Darren Gibbs at Deutsche Bank says although the domestic sector is slightly weaker than expected, the export sector outlook is clearly stronger, which he regards as positive.

Back in March, Bollard was worrying the wold economy might be weaker than expected but "consensus forecasts of trading partner growth have been revised up moderately at this stage," Gibbs says. "Recent data in the US and Asia suggests that upward forecast revisions will be forthcoming." There is some upside risk of stronger growth in Europe too, he says.

Brendan O'Donovan, chief economist at Westpac, is of a similar view. "Banging the drum about consumer weakness ignores the fact that the main drivers of growth are elsewhere: goods-producing sectors such as agriculture and manufacturing have been taking up the baton."

Commodity prices reached a record in March in both world and New Zealand dollar terms and the currency is close to a 10-year low against Australia's, boding well for exports there, he says.

On the other side of the argument, Christina Leung at ASB Bank says as well as retail spending and housing market weakness, uncertainty over the strength of the recovery in the jobs market is providing a further drag on the household sector while drought in many parts of the company will also have an impact on growth.

"The softer tone of data suggests that, while the economy is recovering, there remain some key uncertainties around the strength of that bounce back," Leung says.

« Bollard to hold OCR unchanged

Interest rate hike now in sight »

Special Offers