Stuttering economy likely to stay Bollard's hand

A stuttering economic recovery and strong New Zealand dollar will mean Reserve Bank governor Alan Bollard leaves interest rates unchanged, economists says.

Monday, October 25th 2010, 9:06PM

by Jenny Ruth

All 11 economists surveyed by www.goodreturns.co.nz expect Bollard to leave his official cash rate (OCR) unchanged at 3%. Bollard raised the OCR twice in June and July, the first upwards movements since mid-2007, but then held it steady at the last review in mid-September.

"We've got it from the horse's mouth. The Reserve Bank has made it clear they agree with current market pricing and there own outlook suggests several pauses," says Chris Tennent-Brown, Commonwealth Bank of Australia's New Zealand economist.

A clincher for keeping rates unchanged was the exceptionally weak 0.2% growth in the June quarter, well below market expectations and the central bank's own 0.9% forecast.

Darren Gibbs at Deutsche Bank says more recent data suggests September quarter growth will also fall well short of the Reserve Bank's most recent forecast of 0.8% "with consumer spending looking flat, at best, and construction likely to have weakened."

Still, Gibbs says there risks for December quarter growth turning out stronger than the central bank's 0.4% forecast are, if anything, to the upside.

Brendan O'Donovan, chief economist at Westpac, says offsetting weak growth, inflation is running a little higher at 1.1% in the September quarter compared with the central bank's 0.9% forecast, although he doubts this will cause the Reserve Bank significant concern.

One bright spot is that migration trends have rebounded significantly with net inflows being close to 1,000 people in each of the last three months after slowing to near zero in June.

The central bank had previously highlighted slowing migration as a risk to house sales, leading to weaker house prices and increasing households' unwillingness to spend, O'Donovan says.

"At this point, it's not clear whether the upturn in net migration will alter the Reserve Bank's view on the housing market or merely eliminate the downside risks."

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