Brian Fallow

The Economics Editor of the NZ Herald

Economists reckon OCR review won't buck expectations

Governor Graeme Wheeler said the economy looked to be growing at an annual 3 to 4 per cent over this year's second half.
Governor Graeme Wheeler said the economy looked to be growing at an annual 3 to 4 per cent over this year's second half.

Economists do not expect the Reserve Bank's review of the official cash rate on Thursday to change market expectations of the outlook for interest rates, although its level of concern about the strength of the exchange rate will have risen.

A Reuters survey of 16 banks and other economic forecasters found nearly all of them expect the central bank will start to raise the OCR in March, from its all-time low of 2.5 per cent, and a median forecast - in line with swaps market pricing - that the OCR will have risen to 3.5 per cent by the end of next year.

Governor Graeme Wheeler told the Herald last week that the economy looked to be growing at an annual 3 to 4 per cent over this year's second half (which is in line with the cumulative 1.8 per cent of gross domestic product growth the bank forecast in its September statement) and that inflation was starting to pick up "pretty well in line with what we were forecasting".

Deutsche Bank chief economist Darren Gibbs said, "We see no reason why [the bank] would set out to deliberately change market pricing."

Like the governor, Gibbs noted that the Kiwi dollar has been trading about 4 or 5 per cent higher than the average the bank's forecasts had assumed over the coming year, implying more downward pressure on both prices and activity in the traded goods sector.

Despite the higher exchange rate, Fonterra has raised its forecast payout for the 2013/14 season to levels that imply about a 2 per cent boost to national income compared with last season.

Westpac chief economist Dominick Stephens said on balance the higher exchange rate would outweigh the stronger domestic economy so far as the Reserve Bank's modelling and forecasting were concerned.

"But the Reserve Bank may not want to signal that it is second-guessing the start date of the OCR tightening cycle at this stage. Exchange rates are fickle and responding to every gyration can make a central banker look like a flip-flopper. Furthermore, a dovish signal now could cause a fall in fixed-term mortgage rates, which would add fuel to the housing market fire."

The tension between a currency near record highs on a trade-weighted basis and what Wheeler says is an overheated housing market remains his central dilemma.

ASB economist Daniel Smith said housing credit growth was strong in August and house sales remained firm last month with prices continuing to rise strongly."Net migration remains strong, adding to existing pressures in the Auckland and Canterbury housing markets."

The Reserve Bank imposed curbs on mortgage lending at high loan-to-value ratios (LVRs) at the start of the month and estimated their impact would be the equivalent of a 30-basis-point increase in interest rates.

"It remains too early to assess the impact of the high-LVR lending restrictions which came into force from October, although anecdotes suggest that reduced interest from first-home buyers has been partly offset by increased interest from investors.

"Ironically, the LVR restrictions have prompted banks to offer lower mortgage rates to higher-equity customers, which may stimulate this buyer segment," Smith said.

The kiwi's recent appreciation is part of a global reaction to delays in the tapering of quantitative easing by the US Federal Reserve, which Wheeler said might now be pushed back to March next year or even later.

Political dysfunction in Washington this month took the United States to the brink of defaulting on its debt but the problem has only been kicked to touch until the new year.

However, Gibbs thinks the Reserve Bank will be hesitant to read too much into the appreciation of the exchange rate.

- NZ Herald

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