Next OCR increased pushed further into the future

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With the European debt crisis dragging on, economists expect Reserve Bank governor Alan Bollard will leave interest rates unchanged on Thursday.

Sunday, December 4th 2011, 11:09PM 1 Comment

by Jenny Ruth

However, that's no guarantee retail rates, such as mortgage rates, won't rise soon, particularly if European woes worsen.

Financial markets have even priced in a chance of a rate cut - the week before last, the wholesale market had priced in a better than 100% chance of a cut but by Friday had pulled this back to a 35% cut in April or June.

While none agree a cut is likely, economists are continuing to push out further their expectations of when Bollard will start raising his official cash rate (OCR) from its current 2.5% record low.

A couple, including ASB Bank's Christina Leung, don't expect the OCR will rise until December next year but another two of the 12 economists MortgageRates surveyed still expect a rise in March.

Of the remainder, five are picking a June rise and three think it will be September. Ahead of the October OCR review, three economists were still forecasting an OCR rise this week.

"Uncertainty around the European debt crisis and an apparent slowing in the global economy dominate the economic outlook," Leung says.

"These factors have the potential to adversely affect the New Zealand economy, especially if the crisis escalates significantly," she says.

Dominick Stephens, chief economist at Westpac, says he's expecting Bollard to signal the OCR will be on hold for an extended period, "a significant change of stance."

Peter Cavanaugh at Bancorp Treasury Services says the biggest impact of the European crisis on New Zealand is likely to be through increased bank funding costs.

"Borrowing is likely to become more difficult and more costly," he says.

Darren Gibbs at Deutsche Bank says credit growth over the last 12 months has been sluggish at about $2.3 billion but household deposits have grown more than $8 billion, allowing banks to easily fund new credit at present.

The real crunch will come next year when the banks have to start rolling over their offshore-sourced term funding. "They will have to access more expensive funding," Gibbs says.

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