Currency jawbone, steady OCR tipped for Bollard

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard may signal his disapproval of the high New Zealand dollar when he releases the Monetary Policy Statement next week, which is expected to project no change in interest rates through 2011.

The official cash rate will be kept at 2.5 per cent, the lowest since the OCR was introduced in March 1999, according to a Reuters survey.

The MPS will be a fatter report than the last one in March, when the central bank omitted some of its forecasts because of the level of uncertainty after the Feb. 22 earthquake.

Since then, there have been signs the tradable sector is on a tear. The trade surplus was a record for any month in April. New Zealand hasn't had such strong terms of trade since 1974.

Commodity prices are still heading higher, albeit more slowly. Business confidence has also rebounded but so have inflation expectations. More firms plan to raise prices even though official CPI data doesn't confirm any heat yet.

"Whilst we expect that the RBNZ will paint the recent performance of the economy in a stronger light, if anything we think the bank's projection for the medium-term growth outlook may be slightly weaker than depicted previously," said Darren Gibbs, chief economist at Deutsche Bank, in his preview of the MPS.

Still, the central bank's projections in the MPS will likely point to "a fairly rapid normalisation of policy settings over the course of 2012 once the economic recovery is firmly established," he said. The OCR could reach 4.5 per cent by early 2013, his report says.

Traders bet the OCR will be lifted some 70 basis points in the next 12 months, based on the Overnight Index Swap curve. That could mean three 25 basis point hikes by June 2012.

The kiwi dollar this week climbed above 82.6 US cents for the first time since being allowed to trade freely in March 1985.

On a trade-weighted basis, though, the gains haven't been so historic. The trade weighted index reached its highest level since early 2008, reaching 71.21 on June 1. In last month's Budget, the Treasury had projected the TWI to weaken over coming years.

The Reserve Bank's March MPS had the economy accelerating to 2.7 per cent in the March 2012 year and 4.7 per cent in the following 12 months as Christchurch earthquake spending kicks in.