Reserve Bank likely to hold rates low for longer

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Weaker than expected inflation and economic growth figures, falling commodity prices and a likely tight government budget mean Reserve Bank governor Alan Bollard is likely to leave interest rates unchanged for an extended period.

Sunday, April 22nd 2012, 10:06PM 1 Comment

by Jenny Ruth

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%.

“There's been an accumulation of small surprises which all argue they can keep the OCR low,” says Dominick Stephens, chief economist at Westpac.

Stephens expects Bollard will soften his rhetoric to imply the OCR will stay low for longer – Stephens has just changed his expectation of the first hike in rates from December to March next year.

Most economists aren't expecting the central bank to raise the OCR until December this year or March next year, although Peter Cavanaugh at Bancorp Treasury Services now expects the hike won't be until June next year, basing that forecast on the weaker data flow.

“They've got every reason to do nothing and to be looking to do nothing for a long time,” Cavanaugh says.

While some economists detected signs of domestic inflation re-emerging in last week's inflation data, “the main causes of inflation in the March quarter were petrol, rentals, tobacco and insurance, none of which will respond to changes in the OCR,” Cavanaugh says.

Craig Ebert at Bank of New Zealand, while acknowledging such elements which won't be curbed by interest rate increases, says a large part of the benign inflation outcome reflects the extremely strong New Zealand dollar and structural price falls in predominantly imported electronic and communications goods.

“In estimation, New Zealand’s inflation undercurrents have only just settled into the middle of the (Reserve) bank’s comfort zone, having gotten well over-cooked over the previous upswing,” Ebert says.

“And this has been greatly assisted by what the Reserve Bank would prefer not to have – a soaring exchange rate. We can’t have our cake and eat it too.”

While nothing to get alarmed at just year, “domestically driven inflation is just starting to poke its nose up again,” Ebert says.

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