Bollard tipped to move late in year

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Economists expect Thursday's monetary policy statement to endorse their view that governor Alan Bollard has pushed out when he expects to start raising the official cash rate to the December quarter.

Much has changed in the three months since last December's statement foreshadowed a start to the tightening cycle around the middle of the year, and Bollard has already signalled a later start.

In his January review of the OCR he dropped the phrase "for now" from the key guidance paragraph: "Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5 per cent."

In a speech the following day he said the aftershocks which shook Christchurch just before Christmas had pushed out the Reserve Bank's assumption of the timing of the rebuilding "by a few months, with a gradual lift in activity over 2012, consistent with demolition and repairs to housing and infrastructure getting under way, with reconstruction getting under way in earnest in 2013".

On the international front, moves by the European Central Bank to make €3 trillion of cheap money available to European banks has reduced the risk that Europe will be the epicentre of another global financial crisis.

But its underlying economic problems remain and a European recession, combined with rising oil prices, has seen estimates of global growth this year cut.

New Zealand exporters confront the double whammy of falling prices for export commodities and a rising exchange rate.

ANZ's commodity price index is at a two-year low in world price terms and 9 per cent off its high in May last year.

And on a trade-weighted basis the Kiwi dollar has risen more than 7 per cent since the December statement and is 10 per cent higher than the Reserve Bank assumed it would be by now.

"The shift in market sentiment on Europe has clearly been a factor behind the rebound in risky assets, including the New Zealand dollar," Westpac chief economist Dominick Stephens said.

But the gains seemed bigger than could be justified by fundamentals, especially as export commodity prices had softened.

"It's highly likely that the Reserve Bank will make some strongly worded comments against the currency's strength."

Nevertheless a high dollar reduces inflation pressures and, all else being equal, would allow the bank to keep interest rates low for longer.

Inflation in the December quarter came in much lower than expected, the annual rate falling to 1.8 per cent from 5.3 per cent last June.

Inflation expectations have also fallen sharply.

Despite retail interest rates at multi-decade lows, credit growth remains feeble.

Over the year to January household debt rose just 1.1 per cent, even weaker than the meagre growth of the two preceding years.

Business borrowing grew 2 per cent and farm debt not at all.

But there had been one or two hints of stronger domestic demand which could have an impact on the Reserve Bank's thinking, said ASB chief economist Nick Tuffley.

Retail sales in both the September and December quarters were very strong and not driven by Rugby World Cup-related spending alone, he said, and while the national housing market remained patchy, the Auckland market was starting to pick up again.

In the most recent Reuters poll of 14 forecasters, none expects a rise in the OCR this time.