Central bank unlikely to raise rates this week
Global concerns about credit quality and the rising number of finance company collapses locally mean that Reserve Bank governor Alan Bollard is likely to hold rates steady on Thursday, despite signs that inflation still isn't under control.
Monday, September 10th 2007, 5:30AM
by Jenny Ruth
After the fourth hike in late July, Bollard indicated that might be the last.
"The overall impact of credit uncertainties on real activity, both here and abroad, remains uncertain at present and the Reserve Bank will be in watch-and-wait mode on this front," says Daniel Wills, an economist at ASB Bank.
The central bank is likely to welcome preliminary indications that the housing market and retail spending have slowed since June but it will want to see more evidence that spending-related pressures are abating, he says.
Darren Gibbs, chief economist at Deutsche Bank, expects Bollard will continue to talk tough. The "rhetoric is likely to have changed little."
Among recent developments, employment rose a greater-than-expected 0.7% in the June quarter, returning the unemployment rate to a very low 3.6%, and June quarter inflation was also above the Reserve Bank's expectations, Gibbs says.
Brendan O'Donovan, chief economist at Westpac, notes that the New Zealand dollar is about 7% below the central bank's expectations and that further falls would be very inflationary.
His view is that, by allowing inflation to persist near the top of his zero to 3% bank, Bollard has left himself very little flexibility and "has to talk tough."
O'Donovan thinks the economy may slow quite abruptly in the next six months "but a correction of some kind is inevitable and necessary: New Zealand has been spending beyond its means for years."
If wholesale markets continue to take short-term interest rates to much higher than normal levels above the OCR, as they have done in response to the credit crisis, they will be delivering defacto rate hikes, O'Donovan says.
But Bollard is likely to try all other alternatives to improve market functioning before considering cutting rates, he says.
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