OCR decision a balance of dollar vs inflation

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.”