Bank tipped to sit tight on rates

Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell

But some experts say the status quo could be a missed opportunity to move the economy forward.

Economists expect the Reserve Bank to keep its powder dry when it reviews its official cash rate on Thursday.

It can afford to. Inflation has not been a problem since 2010-11, when an increase in GST drove it beyond the top end of its mandated 1 to 3 per cent target range.

Inflation has been well below the end of the range for the past 12 months and in the September year, it came in at just 0.4 per cent.

By choosing to leave the official cash rate at 2.75 per cent, Wheeler will have more leeway to cut rates later in the year, should the global growth outlook take a turn for the worse and the local economy be in need of some stimulus.

But some economists said that at that level - high by world standards and supportive for the New Zealand dollar - the bank could be foregoing on an opportunity to move the economy forward.

In a speech on October 14, Wheeler - with an wary eye on what lower interest rates could do for an already inflated Auckland property market - said some further easing in the official cash rate seemed likely but that this would continue to depend on the emerging flow of economic data.

"At the same time, however, we remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation," he said then.

"It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly."

Market expectations are that the bank will deliver one more cut in this cycle and Westpac is pencilling in a cut in December.

ASB Bank chief economist Nick Tuffley said the speech showed the Reserve Bank wants to keep some spare ammunition in case global conditions worsen. "We now grudgingly accept the Reserve Bank will not cut the official cash rate in October. But we still believe the weak inflation outlook does warrant lower interest rates now, and expect the stubbornly high New Zealand dollar may force the Reserve Bank's hand come December," Tuffley said.

"The reason the Reserve Bank is reluctant to rush further cuts is that it wants to keep its powder dry in case the global outlook deteriorates markedly over the coming year.

"This is a fair call given the growing risks to the global outlook," he said.

But having an elevated interest rate could present an opportunity cost for growth.

"If inflation is persistently lower than their target, then they are probably foregoing a little bit of growth."

Deutsche Bank chief economist Darren Gibbs said the bank would not cut its rate this week, but he believed it should. "Is there any need to keep policy as tight as it is for another six or seven weeks just so they can go in December," he said.

"What we have had for a number of years is relatively low inflation and yet here we are, seven years after the Global Financial Crisis, and we still have not got the unemployment rate (5.9 per cent) back to a more normal level."