Reserve Bank expected to leave rates on hold
Economists expect Reserve Bank governor Alan Bollard will leave interest rates unchanged when he releases his latest monetary policy statement on Thursday.
Monday, December 6th 2004, 12:57AM
by Jenny Ruth
Tony Alexander, chief economist at Bank of New Zealand, expects he will revert to a hawkish tone after surprising the market at his last official cash rate (OCR) review on October 28 when he signalled rates were unlikely to rise further. The OCR, which has the most influence in determining variable mortgage rates, currently stands at 6.5%.
"We expect to see the Reserve Bank acknowledge that the economy and inflationary pressures are still surprising on the top side and that, unless we also continue to get upside surprises on the exchange rate, this leaves open the possibility of another rise in the cash rate," Alexander says.
The New Zealand dollar rose one cent to 72 US cents last week and also rose two cents to 92 Australian cents.
Macquarie Bank’s economists rate the chances the OCR will be unchanged at 95%.
"The door to higher interest rates slammed shut at the Reserve Bank’s last policy review in October. Since then monetary conditions have tightened even further as the New Zealand dollar surged, placing downward pressure on 2005 GDP growth forecasts," the economists say.
"The currency would need to fall by 10% for additional interest rate hikes to be back on the agenda."
ASB Bank economist Kate Skinner expects Bollard will signal that interest rates will remain on hold for some time. Economic data since October has been mixed. "Growth data have surprised on the upside, but inflation remains under control and the New Zealand dollar has continued to appreciate," she says.
While that means further rate hikes are unlikely, "the Reserve Bank has little headroom to absorb intensifying inflation pressures. Therefore we expect it to signal that a rate cut is off the agenda for some time," Skinner says.
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