Bollard likely to hold rate

Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard is expected to leave the official cash rate on hold at 3 per cent this week, and the lid on rates is forecast to stay on until March l next year.

The bank took a markedly more sombre view of the economic outlook when it released its September monetary policy statement, hauling down the expected trajectory of interest rates as a result.

The flow of economic news since then is seen as validating that more cautious view.

Gross domestic product grew just 0.2 per cent in the June quarter, much weaker than the bank or anyone else had expected.

And the New Zealand Institute of Economic Research's quarterly survey of business opinion produced numbers consistent with the economy marginally contracting in the September quarter, even before the Canterbury quake.

Appearing before Parliament's finance and expenditure select committee last week Bollard highlighted three factors of particular concern.

One is soft credit conditions. Bank lending has increased by only $500 million over the past year, which seen in the context of a $300 billion loan book is infinitesimal. Business credit, in particular, continues to shrink.

The second is the soft housing market. The Real Estate Institute's house price index has been on a declining trend since March and is now nearly 6 per cent off its peak in late 2007. Housing market turnover last month was only two-thirds of its level a year ago.

The third is very soft household consumption. Retail sales were flat in July and August.

Electronic card transactions last month showed some pick-up but most of it was in purchases of durables and may have related to the looming October 1 increase in GST.

The monthly ANZ-Roy Morgan consumer confidence survey out last week was the softest since August last year.

On the positive side, export commodity prices are at historically high levels, even in NZ dollar terms.

The exchange rate, on a trade-weighted basis, has on average been only slightly above the level the Reserve Bank's forecasts assumed.

"For all the recent anguish about global 'currency wars' the New Zealand dollar doesn't really feature as a policy consideration at this time," said Westpac chief economist Brendan O'Donovan.

"It has risen against the beleaguered US dollar but it remains near 10-year lows against the Australian dollar."

Net migration, which was in steep decline in the first half of the year, has turned the corner, with a run rate over the past three months in line with its long-term average.

Deutsche Bank chief economist Darren Gibbs expects Thursday's OCR statement to simply note that incoming information continues to point to a recovery that remains somewhat disappointing at this stage.

It is likely to note that consumer spending is especially subdued and business activity still very cautious.

Market economists are all but unanimous that Bollard will not raise the official cash rate again until March next year.

The average expectation among 11 forecasters polled by Reuters is that he will have raised it 100 basis points, to 4 per cent, by this time next year.

The financial markets are more sanguine, with pricing that implies the next OCR rise will be in April at the earliest. Speaking to the MPs last week Bollard said market pricing was "not unreasonable".