Bollard likely to keep interest rates on hold this week

Continuing turmoil in global financial markets is likely to stay Reserve Bank governor Alan Bollard's hand on Thursday but the big question is how long will it keep him on hold.

Sunday, September 11th 2011, 5:03PM

by Jenny Ruth

All 13 economists surveyed by www.mortgagerates.co.nz expect Bollard to leave his official cash rate (OCR) unchanged at 2.5% this week.

Eight of the 13 now think Bollard's first move to raise rates will come in December with three expecting a 25 basis point increase and the other five picking a full 50 points to unwind the "emergency" cut in March after Christchurch's devastating February 22 earthquake.

Two of the remaining economists are picking a hike as early as October while the other three don't expect Bollard to move at all this year.

"The sharp lift in global risks is the key reason the Reserve Bank will refrain from acting," says Christina Leung, an economist at ASB Bank. "Waiting to see if the risks settle down is prudent."

However, New Zealand data has been surprisingly strong, although there are hints some of the momentum in retail spending and the housing market may be fading, Leung says.

Westpac chief economist Dominick Stephens says the domestic economy is gathering speed and the medium term outlook for inflation is increasingly worrying.

"The economy is recovering faster than realised, perceptions of inflation are not at all well-behaved and some of the Reserve Bank's crucial inflation-dampening assumptions are looking shaky," Stephens says.

But Darren Gibbs at Deutsche Bank, who doesn't see any need for Bollard to raise rates this year, doesn't think the global outlook will be much clearer any time soon.

As for the domestic economy, "whilst the dataflow has been reasonable, contrary to some local bank commentators, we wouldn't describe the general tone of the domestic dataflow as being 'strong' and we note that the greatest strength continues to be found in the 'soft' rather than 'hard' indicators," Gibbs says.

Chris Green at First NZ Capital says central banks around the world are tempering their outlook expectations and Bollard, mindful the New Zealand dollar is very high, won't want to stand out from the pack and risk pushing it higher.

"You don't want to put your hand up with a tightening bias, given the global backdrop."

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