Brian Fallow

The Economics Editor of the NZ Herald

Shadow board backs OCR rise - just

Panel of experts 55% in favour of a higher rate but says Reserve Bank in tight spot with housing and export markets.

The housing market will influence the bank's decision. Photo / Peter Meecham
The housing market will influence the bank's decision. Photo / Peter Meecham

NZIER's monetary policy shadow board thinks the Reserve Bank should raise the official cash rate to 3.5 per cent tomorrow, but it is a line ball call.

The board consists of nine economists and business leaders whom the New Zealand Institute of Economic Research asks to share out 100 points across possible interest rates to indicate, in a probabilistic way, what they believe is the most appropriate level of the OCR. It is their view of what the bank should do, not necessarily what they think it will do.

The latest survey found 55 per cent support for an increase in the OCR, 33 per cent support for no change and the rest for a cut.

NZIER principal economist Kirdan Lees said the bank was in a tight spot and needed to be careful.

"Raising interest rates [tomorrow] shows commitment to the messaging from its June monetary policy statement but could take the currency even higher," Lees said. "Taking a breather could see fixed mortgage rates fall, stoking the housing market - unless financial markets can be convinced further interest rate hikes are just around the corner."

ANZ chief economist Cameron Bagrie, who expects the bank will raise the OCR this time, would prefer an on-hold decision by a 60:40 margin.

"Time for a cup of tea in my opinion, though given the forward guidance delivered in the June monetary policy statement, a hike is probably too hard for the Reserve Bank to step away from. Inflation in the second half of 2014 looks like it will be under 1.5 per cent."

Bagrie sketches the case for a pause in these terms: "Dairy prices are falling like a stone and the New Zealand dollar is not. The nationwide housing market is weakening. Lower export earnings will flow through the entire economy in time. And inflation and wages continue to be well behaved."

But when banks are competing aggressively for borrowers and cheap offshore funding is available, the Reserve Bank needs to keep long-term wholesale interest rates up and prevent the housing market from getting a second wind, he says.

Former Reserve Bank board chairman Arthur Grimes backed a hike tomorrow over no change, by a 60:40 margin.

"While monetary conditions need to be tightened over time ... some of that task is being fulfilled by the New Zealand dollar's appreciation," Grimes said. "Hence the decision of when and how far to increase the OCR is finely balanced."

Steel & Tube chief executive Dave Taylor would like to see the OCR cut.

"Inflation remains low and steady, commodity prices continue to fall and the dollar remains elevated," Taylor said. " No need to push rates further at this stage."

- NZ Herald

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