Debate over timing of the next OCR hike hots up

A www.goodreturns.co.nz survey of 12 economists showed while none are expecting a hike in the official cash rate (OCR) this week, two are now saying the hike could come as early as September and only two now expect Bollard to hold off until March next year. Seven are picking a December hike and the remaining one expects it to come some time in the December quarter.

The OCR currently stands at its lowest ever level of 2.5%. In March, Bollard cut it back to this level because he was worried about the impact of Christchurch's devastating earthquake on February 22 might have on the wider New Zealand economy.

Stephen Toplis at Bank of New Zealand, who is picking rate hikes of 25 basis points in both September and October, says the rationale for March's rate cut has now dissipated.

"Whatever fears the bank might have had as a consequence of that earthquake have not been realised," Toplis says.

Annette Beacher at TD Securities thinks Bollard will raise the OCR 50 basis points in September says he really should remain on hold for a while longer but "we have come to the view that the string of 'strong'

data and aggressive market pricing for tightening means the Reserve Bank will move sooner rather than later."

The economy grew 0.8% in the March quarter compared with the Reserve Bank's 0.3% forecast and inflation of 1% rise in the June quarter compared with the central bank's 0.7% forecast.

At the other end of the spectrum, Robin Clements at UBS New Zealand says Bollard will probably still hold off until March next year.

European austerity measures and likely severe government spending cuts in the US, even it the crisis over raising its borrowing ceiling is resolved, "are hardly going to do anything for growth," Clements says.

And the soaring New Zealand dollar is already applying a significant brake on activity, he says. Under the former monetary conditions index (MCI), the rise in the currency since Bollard last reviewed the OCR on June 9 is probably the equivalent of 150 to 200 basis points, he says.

Comments from our readers

On 25 July 2011 at 8:33 am John Dugdale said:

Wage inflation is hardly rampant is it? House prices are barely increasing - if at all? So why are the markets perceiving a need to increase interest rates so soon? The comatose economy is barely recovering and we are already talking about withdrawing life support.

On 25 July 2011 at 10:07 am Jim said:

The Government has created the problem by increasing GST in spite of warnings about it being inflationary.. Aussie is looking better everyday for anyone earning more than 100k

On 27 July 2011 at 4:17 pm Tracy said:

"The comatose economy is barely recovering and we are already talking about withdrawing life support. "
Hear hear John, well said! We own a small business that supports other small to medium tradies and I can tell you, it is skin of the teeth stuff still out there.
The last thing we need right now is the RB knocking us back down.

Debate over timing of the next OCR hike hots up

Reserve Bank governor Alan Bollard isn't likely to raise rates on Thursday but the debate about how soon or late the first hike will be has hotted up following stronger than expected growth and inflation data.

Sunday, July 24th 2011, 3:23PM 3 Comments

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