OCR likely to remain unchanged

Nobody expects the Reserve Bank to do anything to interest rates this week when it releases its latest quarterly Monetary Policy Statement. Bloomberg’s survey of 12 economists found none expect any change.

The central bank last raised the OCR in July and has lifted it from 4.75% to 5.75% so far this year.

While previously some economists had been expecting at least one more rate rise, the global economy has deteriorated sufficiently for most to rule this out. That’s even though the domestic economy is somewhat stronger than previously expected.

Westpac chief economist Adrian Orr says the wholesale market is slowly pricing in that the next move in rates is likely to be a cut. Current pricing has almost a single 25 basis point cut by June next year.

Stephen Toplis, head of market economics at Bank of New Zealand, says "the external economy, despite the best efforts of central banks, is looking sicker by the day."

The Reserve Bank’s last statement in August assumed our trading partners’ economies would grow 2.6% this year but consensus forecasts have fallen to 2.5%. For next year, the central bank had assumed 3.3% growth and consensus forecasts are now at 3.1%.

"It is fair to say that the case for an easing sometime next year has now grown substantially and, at this stage, it would not take much to tip the balance," Toplis says.

Still, both Toplis and Orr say the global economy is still growing.

"What we’re witnessing at the moment is asset price corrections (in global share markets), not growth concerns," Orr says. He remains confident that the global economy will pick up before the domestic economy slows too much.

ANZ economist Sean Comber, hasn’t ruled out the possibility of further rate increases. If the international economy starts showing signs of improvement, then "domestic pressures will very quickly become sufficient to warrant further (small) rate increases."

The biggest risk is from geopolitical tensions, including the possibility of further significant terrorist attacks and the risks to oil prices if Iraq fails to comply fully with weapons inspections, he says.