No rate relief this week: Economists

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With inflation a continuing problem, Reserve Bank governor Alan Bollard is likely to hold interest rates at current high levels, despite an increasingly uncertain outlook for world growth and drought dampening agricultural production.

Sunday, March 2nd 2008, 8:40PM

by Jenny Ruth

All 10 of the economists surveyed by Good Returns expect Bollard to keep his official cash rate (OCR) at 8.25% when he releases his latest monetary policy statement on Thursday.

While a clear majority of economists are expecting Bollard to start easing either late this year or early next, Westpac and Infometrics are still warning that the next move could well be up.

Westpac chief economist Brendan O'Donovan says Bollard is facing a dilemma "sandwiched between rampant inflation pressures and an ugly outlook for the US and European economies" so the course of least resistance for now is inaction.

However, "we continue to believe that the Reserve Bank is underestimating the momentum in inflation," O'Donovan says.

But Nick Tuffley, chief economist at ASB Bank, says that with bank's funding costs having risen sharply and the New Zealand dollar higher than the central bank had expected, monetary conditions have effectively tightened without the Reserve Bank having to do anything.

"There's very little reason for the Reserve Bank to lift rates at this stage, no matter how concerned they are about inflation," Tuffley says.

However, one of those with more dovish views, Robin Clements at UBS New Zealand, has pushed back his forecast of when Bollard will start cutting rates from June to December, citing the strength of the labour market with the unemployment rate at record lows and wage growth at more than 4%.

"They're lagging indicators and will be the last to turn, but until it does, the Reserve Bank won't be keen to add more fuel to the fire," Clements says.

Darren Gibbs at Deutsche Bank says he expects Bollard to continue to say that a genuine easing cycle is still a distant prospect. But he will be looking for signs that the governor may be contemplating "an earlier one-off downward recalibration of the OCR" to counter the unexpected tightening of monetary conditions recently.

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