Brian Fallow

The Economics Editor of the NZ Herald

Experts tip lift in OCR

Focus will be on small print for clues to Reserve Bank's thinking about likely pause to follow.

Reserve Bank Governor Graeme Wheeler has built a good record of clear and accurate communication regarding future OCR changes. Photo / Mark Mitchell
Reserve Bank Governor Graeme Wheeler has built a good record of clear and accurate communication regarding future OCR changes. Photo / Mark Mitchell

With a fourth successive increase in the official cash rate on Thursday widely expected, the focus will be on what the brief accompanying statement indicates on the Reserve Bank's thinking about the duration and conditionality around the likely pause to follow.

The 16 forecasters polled by Reuters put a 75 per cent probability on the bank raising the OCR 25 basis points to 3.5 per cent this week, but six of them expect that to be it until next year, and the other 10 don't see the bank raising rates again until December.

A fourth OCR lift this week will mean the bank has delivered half of the tightening it projected in June would be necessary over two years.

It will still leave the OCR a full percentage point of the stimulatory side of what it considers a neutral rate, and when the economy is growing about a full percentage point faster than the bank considers sustainable on the basis of such fundamental capacity factors as growth in the workforce and productivity.

As that combination is not tenable indefinitely, Thursday's statement is expected to reiterate the need for more tightening to come.

But the flow of economic data since the June monetary policy statement indicates less urgency, economists say.

"The Reserve Bank was already expecting growth to slow in the second half of this year," said AMP Capital chief economist Bevan Graham. "What has gone is risks to the upside."

The exchange rate has been running about 2 per cent higher than the bank assumed in its June forecasts.

Even after last week's triple whammy of sharply lower export dairy prices, weaker-than-expected June quarter inflation data and a jump in geopolitical risk aversion on Friday, the kiwi dollar ended the week more than 1 per cent stronger than the bank had forecast.

ASB economist Christina Leung said it was too soon to tell if tensions in Ukraine and Gaza would have a lasting impact on financial markets.

The Reserve Bank was between a rock and a hard place, she said, facing a choice between dragging the New Zealand dollar higher with the OCR, or pausing and triggering an unwanted drop in term interest rates.

At the time of the June statement the bank was fretting that despite its OCR increases, longer-term wholesale rates, and with them fixed-term mortgage rates, had in fact fallen.

The situation had since corrected, and the bank would be keen not to see them fall again by failing to follow through with a very clearly signalled OCR rise this week.

Chief economist at Westpac, Dominick Stephens, said governor Graeme Wheeler had built an admirable record of clear and accurate communication regarding future OCR changes. Failing to hike this week would risk squandering that hard-won credibility, he said.

The latest fall in dairy prices make a cumulative decline of more than a third from the peak last February.

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Stephens said that in an alternative scenario within the June monetary policy statement, the Reserve Bank had indicated what it would do if export prices deteriorated unexpectedly. It would still raise the OCR in a front-loaded fashion, but slow the pace of later OCR hikes.

Surveyed business sentiment has softened a bit but remains high by historical standards.

Deutsche Bank chief economist Darren Gibbs said: "These indicators, together with hiring and capex intentions, remain at well above average levels and we think the recent decline will be viewed by the Reserve Bank as neither surprising nor unwelcome as evidence of an economy beginning to transition to a more sustainable pace of growth."

Consumer confidence is also high; electronic card transactions point to a 1.5 per cent rise in nominal retail spending in the June quarter and net migration continues to run strongly.

Gibbs expects Thursday's statement to indicate that on balance the central bank sees the outlook for the economy and inflation to be only slightly weaker than depicted in June.

He expects reference to a pause in the tightening cycle to allow it to assess the impact of the OCR increases delivered already, and transparency on which indicators the bank will watch most intently.

"In particular the bank will continue to monitor developments in the housing market, the exchange rate and the outlook for commodity-based incomes."

- NZ Herald

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