Views divided on when OCR will start rising

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Nobody is expecting Reserve Bank governor Alan Bollard to raise interest rates on Thursday, despite the strong than expected economic developments since his last monetary policy statement in September.

Sunday, December 6th 2009, 10:09PM

by Jenny Ruth

Bollard is expected to leave his official cash rate (OCR) unchanged at 2.5% with the market focusing on clues as to when the first rate hike of the cycle will be.

Economists are divided on how soon that hike will come with views ranging from as soon as January through to July while the market is currently pricing in an April hike.

Jane Turner at ASB Bank is backing the market's view, forecasting a 50 basis point rise to 3% in April,$ although she expects Bollard to "stick to the script" on Thursday of no hikes until the second half of the year.

Since September, the global outlook has improved, as has consumer and business confidence, while house price inflation has gained momentum and general inflation pressures are unwinding slower than expected, Turner says.

Annette Beacher at TD Securities says Bollard should begin gently raising rates from January but that the central bank is "well known for sticking to its guns despite overwhelming pressure to move with the times."

Brendan O'Donovan, chief economist at Westpac, says in all the previous OCR reviews this year, Bollard could point to the stronger New Zealand dollar as offsetting other positive economic news but this time the currency is lower than at the last OCR review in October.

As a result, "we expect a more hawkish set of forecasts," he says, although the language of the press release is likely to be relatively cautious.

"We think if they can get away with retaining the wording of the October statement (that the OCR will stay where it is until the second half of 2010), they'll do it."

O'Donovan says the economy likely grew 0.4% in the September quarter, above the Reserve Bank's last 0.1% forecast, but the December and March quarters "could be absolute stormers with growth of 1% or more."

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