Bollard likely to hold interest rates steady

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Delays to Canterbury's rebuild, diminishing inflation pressures and the strength of the New Zealand dollar mean Reserve Bank governor Alan Bollard will probably keep interest rates steady this week and for much, if not all, of this year.

Monday, March 5th 2012, 6:18AM 1 Comment

Of the 13 economists surveyed by www.mortagerates.co.nz, all expect no change to Bollard's official cash rate (OCR) on Thursday, currently at a record low of 2.5%.

While divided on how soon that will change, all are expecting the OCR will eventually rise with four expecting that will come in September. Five are picking December and the remaining four March next year.

Darren Gibbs at Deutsche Bank, who is officially still opting for a September hike, says "it's not going to be sooner than September." Financial markets have priced in only half a chance of a hike in December and don't have a full 25 basis point rise priced in until early next year, Gibbs says.

The annual rate of inflation dropped to 1.8% in the December quarter from 4.6% in the September quarter as 2010's GST increase dropped out of the equation.

Chris Green at First NZ Capital says the strengthening New Zealand dollar is likely to become an increasingly difficult issue for the central bank to manage, making Bollard loath to raise the OCR for fear of driving the currency still higher.

That's especially the case in a climate in which other central banks around the world are still running exceptionally easy interest rate regimes, Green says.

In December, the Reserve Bank was predicting the trade-weighted index of the New Zealand dollar would average 67 points in the March quarter but its own data showed it just below 74 points last week.

"More people now think it (the currency) will hold up at these levels. To me, that's a major development," Green says. He doesn't expect an OCR hike until next year.

Peter Cavanaugh at Bancorp Treasury Services, who is also forecasting the OCR will remain where it is until March next year, says it's clear the Christchurch rebuild will start later than expected and will likely be slower while the high currency will put pressure on the export sector.

As well, recent soft domestic data "gives the Reserve Bank every reason to sit on its hands," Cavanaugh says.

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