Interest rate focus moves to when next increases start

Reserve Bank governor Alan Bollard is likely to leave interest rates unchanged this Thursday and the focus will be on how upbeat or otherwise his comments are.

Monday, April 25th 2011, 10:06PM

by Jenny Ruth

Bollard's official cash rate (OCR), from which floating mortgage rates and other short-term interest rates are set, stands at 2.5%, the lowest it's ever been, following last month's "emergency" cut from 3% in the wake of Christchurch's devastating earthquake.

All 13 economists surveyed by Good Returns expect Bollard to leave the OCR unchanged with the debate shifting to when he will starting raising the OCR to more normal levels.

Darren Gibbs at Deutsche Bank expects Bollard's comments "will appear slightly more upbeat, if for no other reason that the passage of time means that the statement will dwell less on the destruction in Christchurch and more on the eventual recovery."

However, given the near-term uncertainties surrounding near-term economic performance, Bollard is likely to simply reiterate that future OCR rises will be guided by emerging data, Gibbs says.

Jane Turner at ASB Bank says Bollard is likely to highlight that uncertainty. "It remains clear that the New Zealand economy remains fragile and in need of continued monetary support," she says.

Some economists are starting to fret about future inflation pressures. Tony Alexander, chief economist at Bank of New Zealand, says inflation data earlier this month showed inflation is at the average level of the past 10 years, despite near zero economic growth, above average employment, spare capacity in the economy and a rising currency.

"Imagine what will happen next year when growth heads towards 4%, the unemployment rate veers toward 5% (from 6.8% currently) and businesses look to rebuild margins which have been crimped since 2008," Alexander says.

However, Annette Beacher at TD Securities says she can't see any inflation in the New Zealand economy. "I think pricing power is negligible in New Zealand and the currency's likely to keep a lid on it (inflation)," she says.

Bollard needs to stop talking about the temporary nature of the currently low OCR, Beacher says. "A slightly dovish view would be most welcome."

« To fix or float? That is the question

OCR unchanged and likely to stay that way for some time »

Special Offers