Odds on March rise in OCR

By Brian Fallow

Most forecasters believe the Reserve Bank will avoid raising interest rates on Thursday.

"The Reserve Bank is now explicitly targeting the mid-point", says chief economist Cameron Bagrie. Photo / Mark Mitchell
"The Reserve Bank is now explicitly targeting the mid-point", says chief economist Cameron Bagrie. Photo / Mark Mitchell

Most economists expect, on balance, that Reserve Bank governor Graeme Wheeler will wait until the next monetary policy statement in March to start raising the official cash rate rather than go at the next opportunity on Thursday.

A Reuters poll of 17 forecasters found only three banks - ANZ, HSBC and Citibank - ready to predict an increase this week. However the average probability forecasters assigned to an imminent hike was hardly negligible at 30 per cent.

And money market pricing is more aggressive, with Credit Suisse's swaps-based indicator putting the odds close to 50/50.

The OCR has been at an all-time low of 2.5 per cent for nearly five years, apart from the second half of 2010 when it was raised to 3 per cent - a move reversed after the February 2011 earthquake.

The revival in construction and manufacturing activity as rebuilding in Canterbury gathers pace is one of the main reasons the central bank has been signalling with increasing clarity for some months that such a low OCR has just about reached its use-by date.

In addition the economy is enjoying high export commodity prices, a surge in net immigration as the Australian economy slows and the warming effect on consumer confidence and spending of rising house prices.

The December monetary policy statement pencilled in four or five OCR rises this year starting in March or April.

Since then two of the major economic statistics have come in notably stronger than the Reserve Bank forecast. September quarter gross domestic product growth was 1.4 per cent when the bank had expected 1.1 per cent and the December quarter consumers price index rose 0.1 per cent when the bank picked a fall of 0.2 per cent.

That pushed annual inflation to 1.6 per cent, closer to the mid-point than the bottom of the Reserve Bank's target band, ANZ chief economist Cameron Bagrie points out.

"The Reserve Bank is now explicitly targeting the mid-point," Bagrie said, and he is now predicting a rate hike this week.

The Reuters poll found a median forecast that the OCR will rise a full percentage point (100 basis points) to 3.5 per cent by the end of the year.

Westpac chief economist Dominick Stephens is picking five hikes to 3.75 per cent.

The case for higher rates is already sealed, he says, but the economic benefits of going this week are small while the communication benefits of waiting until March are substantial.

Waiting for a full monetary policy statement would allow the bank to spell out its reasons and forecasts not only in the document itself but also in the accompanying press conference and appearance before Parliament's finance and expenditure select committee.

It allows the bank to publish an indicative forward track for the next two years. By contrast a move this week would be accompanied only by a brief statement of a few paragraphs.

The risk is that the financial markets would interpret it as the Reserve Bank believing it is behind the curve and scrambling to play catch-up, and they would consequently yank wholesale interest rates and the dollar higher.

ASB chief economist Nick Tuffley takes a similar view to Stephens.

The economic data have been stronger than the Reserve Bank forecast but not dramatically, he says. By waiting until March it could more precisely signal its views on the pace and magnitude of the tightening cycle ahead and lessen the risk of misinterpretation by the markets.

But Tuffley notes that it is not unprecedented for the bank to begin a tightening cycle without a full monetary policy statement - it did so in January 2004.

- NZ Herald

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