Brian Fallow

The Economics Editor of the NZ Herald

Bollard tipped to hold fire on OCR

Dr Alan Bollard. Photo / Mark Mitchell
Dr Alan Bollard. Photo / Mark Mitchell

Concerns about the European debt crisis and the global economy more broadly are expected to stay the Reserve Bank's hand when it reviews the official cash rate on Thursday.

At the last review on September 15 governor Alan Bollard said he was likely to raise the OCR if global developments proved to have only a mild impact on the New Zealand economy.

"[But] for now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 per cent."

Economists expect this week's decision to reiterate that conclusion.

In the most recent Reuters poll of 19 forecasters, none expects a rate hike this week and only four expect one before the end of the year, but 13 expect one in the March quarter next year. By the middle of next year the median expectation is that the rate will be 75 basis points higher than now.

The money markets are more dovish, and do not have the first OCR hike fully priced in until mid-2012.

The international concern is not just whether the Europeans will manage to avert another global financial crisis by coming up with a credible plan to limit the fallout from formally acknowledging Greece's insolvency; the absence of such a deal has caused international bank funding markets to tighten, threatening to raise New Zealand banks' cost of funds.

Forecasts for growth in the global economy have been lowered markedly. "There is now a real risk that global economic activity slows sharply," the Reserve Bank said last month.

ASB chief economist Nick Tuffley said that as well as the eurozone situation, the bank would be wary of continued theatrics from American politicians as United States fiscal issues returned to focus later this year.

Since the September statement export commodity prices have continued to soften, though they remain historically high and the decline has been offset by a weaker exchange rate, which is about 4 per cent lower than the average the Reserve Bank forecast for the current quarter.

Domestic indicators have tended to show a fading of the momentum evident late last year and early this year.

Electronic card transactions, a proxy for consumer spending, grew just 0.5 per cent by value in the September quarter. They rose more than 2 per cent in the two preceding quarters.

Turnover in the housing market has flattened, though prices continue to creep up.

Gross domestic product in the June quarter rose just 0.1 per cent, where the Reserve Bank had forecast 0.6 per cent, making an annual rate of 1.5 per cent.

Credit growth in the year to August was just 0.8 per cent, indicating ongoing caution on the part of households and businesses despite resilient levels of surveyed confidence.

Net migration flows have been negative for six of the past seven months, making a gain just 770 for the year when the long-run average is 12,000.

And credit rating downgrades have focused politicians' attention on measures to curb Government spending and boost household savings.

"The increase in [bank] funding pressures since the flare-up of the eurozone debt crisis adds to the case for the Reserve Bank to hold fire for now," Tuffley said. "The recent downgrade to New Zealand's credit rating by Fitch and Standard & Poor's also has the potential to push up funding costs for banks at the margin."

As far as the inflation outlook is concerned, the market expects today's consumers price index report to record a rise of 0.7 per cent in the September quarter, cutting the annual rate to 4.9 per cent from 5.3 per cent in June.

"If so, we expect the Reserve Bank will simply reiterate that much of the current spike inflation has been driven by last year's GST increase and that underlying inflation, whilst on an upward trajectory, is presently running at a more comfortable 2 per cent or so," said Deutsche Bank chief economist Darren Gibbs.

- NZ Herald

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