Prospects of June rate rise increase

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The prospect of an increase in the official cash rate increased slightly yesterday on the back of a speech by Reserve Bank Governor Alan Bollard.

Thursday, May 6th 2010, 10:52PM

The speech was interpreted by financial markets as being a little hawkish, and pricing shortly after the speech suggested a 72% chance of a rate hike at the next official cash rate (OCR) announcement in June, compared to 68% previously.

JP Morgan economists say the key part of yesterday's comments were the "truck driver" analogy:

"Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months we expect to reduce the pressure on this pedal, but in effect to keep some throttle going. Truck drivers know they must reduce acceleration long before the corner. We are not talking about tightening policy yet. We do not expect to have to touch the brake pedal for the some time."

"This implies that the RBNZ is readying to remove the policy stimulus, but exactly when the truck driver will decide to ‘reduce acceleration' will depend on how the economic data evolves," JP Morgan says.

They says that if economic data continues to evolve in the remarkably positive fashion of Thursday's employment numbers a June rate hike will be delivered.

However, Bollard said that conditions on the domestic front remain fragile, with a significant element of caution among businesses, which have no significant plans to invest or rehire. For the household sector, he acknowledged the "soft" pick-up in house prices, new building, and sales. The forthcoming data on retail sales, house prices, and inflation expectations, in particular, and of course the May 20 Budget will, therefore, be key to the June policy decision.

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