Bollard likely to keep interest rates steady

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Continuing uncertainty about how Europe's debt crisis will be resolved combined with benign inflation locally means Reserve Bank governor Alan Bollard is likely to hold interest rates steady this week.

Monday, January 23rd 2012, 6:25AM

And, as economists continue to push their expectations of when he will next raise rates further into the future, there's even a chance Bollard will change his tightening bias to neutral.

All 13 economists surveyed by Mortgage Rates expect no change on Thursday when Bollard reviews his official cash rate (OCR) which currently stands at a record low of 2.5% where it has remained since March in the wake of Christchurch's devastating earthquake.

Economists are currently evenly divided as to whether the first OCR hike will come in September or December. Craig Ebert at Bank of New Zealand, whose current pick is September, says the risk is it will remain unchanged into next year.

Ebert says while it's possible Bollard will move to neutral, he doesn't expect that will happen.

"He may give some ground in respect of some of the domestic issues," but the European situation now is no worse than when Bollard released his last monetary policy statement (MPS) in December.

Annette Beacher at TD Securities says last week's weaker than expected inflation data - the consumer price index fell 0.3% in the December quarter compared with market and Reserve Bank expectations of a 0.4% increase - will simply provide Bollard with additional comfort about holding rates.

Beacher has pencilled in a 50 basis point OCR rise to 3% for December this year "but risks of slippage into 2013 are high as unstable ground potentially delays the full-scale repairing and rebuilding of Christchurch."

Matt Nolan at Infometrics says there's even a very outside chance Bollard may cut the OCR - certainly the wholesale financial markets are attempting to price in a cut.

The strength of the New Zealand dollar - it is more than two US cents higher than when the MPS was released on December 8 - and the weak recent domestic data, including weak retail sales, could be used to justify a cut, Nolan says.

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