OCR decision a balance of dollar vs inflation

We won’t get an official cash rate increase this month, but it may not be far off, economists say.

Friday, October 25th 2013, 12:11PM

by Susan Edmunds

A poll by mortgagerates.co.nz found all the economists surveyed expected the rate to stay at 2.5% at the next OCR statement on Thursday. But they said it was only a matter of months before the rate would start to creep up.

Westpac’s chief economist, Dominick Stephens, said the Reserve Bank had been gradually building the case for higher interest rates all year. Its forecasts had lent more and more towards sharper, sooner rate hikes, he said.

But he said that might change next week. The dollar has gone from strength to strength since the September monetary policy statement and Stephens said Reserve Bank Governor Graeme Wheeler might sound a bit more hesitant about hikes because of that. He said the exchange rate would outweigh the stronger domestic economy in the Bank’s modelling.

Stephens has been predicting a March rise for the OCR but he said it might now be later than that. “We expect the housing market will soon slow in response to sharply higher fixed mortgage rates and the LVR restrictions. Subject to confirmation that next Thursday’s OCR review is along the lines we expect, we are likely to shift our call to forecasting an April 2014 start date to the OCR hiking cycle.”

ANZ’s economists are giving themselves more breathing room – predicting an OCR rise in the first half of next year.

Infometrics’ Gareth Kiernan said it would be an overreaction to change the OCR path because of the strength of the dollar. He is still expecting the next increase in the OCR to be 25 basis points in March. He said the higher dollar was not enough to delay tightening yet.

Robin Clements, of UBS, agreed with the March prediction. He said if the dollar stayed strong and LVR restrictions did not slow house price inflation, hikes could be needed sooner. But he said he did not think Wheeler would want to rattle the cage at present.

ASB chief economist Nick Tuffley agreed the renewed strength of the dollar was the biggest change since the September statement. But he said, despite that, house prices would likely keep rising and inflation pressures were building to levels that the bank might eventually find uncomfortable, so a March rise was likely.

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OCR unchanged at 2.50% »

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