Bollard's views on inflation keenly sought; OCR on hold

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What Reserve Bank governor Alan Bollard makes of rising inflation expectations will be a key message financial markets are looking for from his next monetary policy statement on Thursday.

Monday, June 6th 2011, 6:00AM

by Jenny Ruth

None of the 13 economists surveyed by Goodreturns.co.nz expect Bollard to move his official cash rate (OCR) from its current record low at 2.5%, making the tone of his comments all important.

The central bank's own survey of expectations last month showed a sharp jump in two year ahead inflation expectations from 2.6% three months ago to 3%, even as businesses wound down their expectations of how fast the economy will grow.

Robin Clements, an economist at UBS New Zealand, says he wants to know how much of a worry Bollard finds the survey results "or is it not a worry yet? Are they fretting somewhat about the probable inflation pressures emerging from the Christchurch reconstruction?"

Construction materials prices, building industry wages and house prices are likely to rise and "housing being the normal problem-child for New Zealand," Clements says.

Craig Ebert at Bank of New Zealand is also looking for an acknowledgment from Bollard that inflation pressures are rising.

While increasing uncertainty about the global economy and the very high New Zealand dollar are offsetting factors, "the economy's hanging in there and is picking up," Ebert says.

Christina Leung at ASB Bank says this will be the first time since the Christchurch quake that the Reserve Bank has released a full set of forecasts.

On top of rising inflation expectations, "recent data suggest tentative signs of a pick-up in underlying economic activity, with business confidence rebounding back to pre-earthquake levels," Leung says.

She is still in the majority though in expecting the large degree of uncertainty still about economic growth, and the fact that the Christchurch rebuilding hasn't yet begun in any meaningful way with the city still experiencing aftershocks and the risk of another major quake, will mean Bollard will hold the OCR steady until next year.

Six of the economists in the GoodReturns survey expect the OCR won't rise until March next year, one expects an increase some time in the March quarter and two others are expecting a hike in January. Another four say the next rise could be as early as December this year.

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