Borrowers can relax as rate rise unlikely

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With consumers keeping a tight rein on their wallets and concentrating on paying off debt rather than borrowing more, Reserve Bank governor Alan Bollard won't be raising rates this week, economists say.

Sunday, January 23rd 2011, 10:45PM

by Jenny Ruth

All 14 economists surveyed by www.goodreturns.co.nz expect Bollard to leave his official cash rate (OCR) unchanged at 3%. Bollard raised the OCR twice in June and July last year, the first upwards movements since mid-2007, but has held it steady since.

Late last year, the consensus was the next upward movement in the OCR would come about June but now many economists are pushing this back to September or later.

Brendan O'Donovan, chief economist at Westpac is one of them, largely because of the "shocker" outturn of September quarter GDP which fell 0.2%, against market and Reserve Bank forecasts of a 0.3% rise.

"The fact remains that the economy has not shown anywhere near the momentum that it should at this stage of a recovery," O'Donovan says.

Apart from the one-off impact of the October GST increase and global food price inflation, "this is not an economy that's generating a lot of inflation under its own steam right now," he says.

Robin Clements at UBS New Zealand isn't convinced that's the case, arguing about a third of retailers haven't raised their prices up at all, despite the GST increase. "If that's true, is there more lagged GST (price hikes) to come through?" Clements still thinks Bollard will raise the OCR in June.

Paul Bloxham, chief economist at HSBC for Australia and New Zealand, is also still picking a June hike in the OCR, arguing the current OCR rate is still at emergency levels.

With inflation looking like it will pick up globally, it's likely that once Bollard is convinced demand is recovering he will see no reason to keep the OCR so low, Bloxham says.

But Annette Beacher at TD Securities reckons its about time Bollard drops his tightening bias altogether. Even though the OCR is very low, it isn't stimulating activity such as retail sales and the housing market.

"If there's no activity at 3%, why does he keep talking about higher rates," Beacher asks. Bollard could assist in gently stimulating activity and put a dampner on the rampant New Zealand dollar "by simply stating that monetary policy is appropriate for now and shelve the reference to requiring higher interest rates 'at some stage'," Beacher argues.

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