RB expected to hold OCR till mid-2004

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Despite the housing boom accelerating, much to the Reserve Bank’s vocal dismay, it is unlikely to spoil the party any time soon.

Sunday, October 19th 2003, 10:45PM

by Jenny Ruth

Economists expect the central bank to leave its Official Cash Rate (OCR) unchanged at 5% both at Thursday’s review and well into next year.

"The Reserve Bank will remain comfortably on hold, despite the clear inflation pressure in housing," says Westpac Bank’s economists.

"The awkward stand-off between strong domestic inflation pressures, largely housing, and soft external pressures, particularly from the high New Zealand continues," they say.

While the consumer price index rose 0.5% in the September quarter, housing costs rose at four times that pace. Still, the overall annual inflation rate is just 1.5%, right in the middle of the Reserve Bank’s zero to 3% target range.

"We still expect the Reserve Bank to hold fire until the second half of 2004, though not without a little fingernail chewing between now and then."

National Bank senior economist Cameron Bagrie has the same view, although he cites three risks that may change that view: that the government will spend more than is currently anticipated, that the New Zealand dollar will subside against the US dollar, or at least halt its upward march and that the strength of domestic activity continues to surprise.

Retail sales continue to show "pep" while both consumer and business confidence is rising. At the same time, expectations of global growth are rising and international commodity prices have improved for three straight months, Bagrie notes.

While also expecting no increase in the OCR, ASB Bank economist Kate Skinner thinks there’s a risk that Reserve Bank governor Alan Bollard will take a more hawkish tone than he took in September when he last reviewed the OCR.

"Strong domestic demand and a rampant housing market will rule out an easing bias, while the recent New Zealand dollar appreciation and the expectation that it will continue will delay an explicit tightening bias," she says.

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