Economists unruffled by OCR statement

This morning's announcement that the OCR will remain at 2.5% has prompted minimal reaction.

Thursday, July 26th 2012, 12:00AM

by The Landlord

Westpac said the Reserve Bank decision to leave the Official Cash Rate at 2.5% hadn’t affected its prediction that the first increase would be in July 2012.

Bank economists said the decision by Alan Bollard was most notable for how little had changed since the last announcement in June.

Bollard said: "New Zealand's trading partner outlook remains poor, with several euro-area economies in recession. There remains a limited risk that conditions in the euro area deteriorate very significantly. The Bank continues to monitor the situation carefully given the potential for rapid change.

"Domestically, the Bank continues to expect economic activity to grow modestly over the next few years. Housing market activity continues to increase as forecast, and repairs and reconstruction in Canterbury are expected to further boost the construction sector. Offsetting this, fiscal consolidation and the exchange rate are constraining demand growth.

"Underlying annual inflation, which recently moved below 2 per cent, is expected to settle near the mid-point of the target range over the medium term.”

But the Westpac economists said Bollard didn’t put as much negative emphasis on the high dollar as they had been expecting.

“Markets were expecting a slight dovish shift, so this statement is therefore slightly positive for the NZD and NZ swap yields. [It] was a slightly firmer tone than we or the markets were expecting – we thought there might have been more acknowledgement of the high exchange rate and the recent subdued inflation developments."

ASB economist Christina Leung said: ""The Reserve Bank's outlook is broadly unchanged. They expect the recovery to be modest and the rebuilding activity in Christchurch will underpin the recovery."

Doug Steel at Bank of New Zealand said some economic numbers since the June statement have been a little stronger and some a little weaker than the central bank expected but, overall, the economy was developing as expected.

"All in all, it's all about watching Europe," Steel said.

Bollard said there was "a limited risk" that conditions in the euro area might deteriorate very significantly.

Darren Gibbs at Deutsche Bank said the central bank was clearly monitoring offshore events. "In that sense, they're open to a change of view if something changes significantly in Europe."

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