Inflation tipped to keep OCR at 7.25pc

Alan Bollard

New Zealand's central bank Governor Alan Bollard will probably leave interest rates at a record high this week because of the threat of inflation, ignoring a plunge in business confidence that may have stalled the economy.

All 14 economists surveyed by Bloomberg News say Bollard will leave the official cash rate at 7.25 per cent, the highest of any nation with the top credit rating at Moody's Investors Service. He will announce his decision on Thursday.

Bollard, who is required by the Government to keep annual inflation between 1 per cent and 3 per cent, has raised rates nine times since January 2004 to curb inflation as soaring house prices and falling unemployment buoyed consumer spending. Consumer prices rose 3.2 per cent last year and inflation won't return to the bank's target zone until 2008, said economist Stephen Toplis.

"The central bank is an inflation fighter, not a growth defender," said Toplis, head of market economics at Bank of New Zealand. "It would be nothing short of negligent for the Reserve Bank to move away from a tightening bias."

Still, the central bank "will feel more comforted that it is on top of the inflation battle" and need not raise rates again, Toplis said. He doesn't expect a rate cut until 2007.

Bollard in December said he saw little scope to cut rates, citing the strength of consumer spending and the housing market. Just two economists expect a rate cut before June 30 as a surge in house prices and a record-low jobless rate continue to boost incomes and encourage spending.

New Zealand's jobless rate is 3.4 per cent, the lowest of 27 economies in the Organisation for Economic Cooperation and Development. Wages rose 2.8 per cent in the year through September, the fastest pace since records began in 1992.

House prices rose 16 per cent in December from a year earlier, according to Government figures. About 60 per cent of home loans are at fixed rates, insulating home owners from the increase in benchmark interest rates and allowing them to borrow against the rising value of their homes.

Twelve of 14 economists surveyed by Bloomberg News expect Bollard will cut interest rates in the third quarter, convinced that slower economic growth will take the pressure off prices. Growth will slow to about 1.5 per cent this year from an estimated 2.4 per cent in 2005, according to a survey of 11 economists last month.

About two-thirds of 524 businesses surveyed last month expect the US$97 billion ($142 billion) economy will worsen in the next six months, according to a survey by the New Zealand Institute of Economic Research published last week. Fourth-quarter trading was the worst in seven years and 36 per cent of companies expect first-quarter profits will decline.

The results "significantly raise the possibility we get two negative quarters of gross domestic product in a row" beginning in the fourth quarter of 2005, said Brent Layton, director of the Wellington-based institute.

Amid other evidence economic growth is slowing sharply, consumer confidence fell to a five-year low in the fourth quarter, according to the Westpac-McDermott Miller consumer confidence survey. House sales in December fell to a four-year low, according to Real Estate Institute figures last week.

"It's harder and harder to dismiss the evidence" that economic growth is slowing, said Nick Tuffley, senior economist at Westpac. "That slowdown is going to lead to inflation peeling off." He expects Bollard will cut rates four times this year, beginning in July.

- BLOOMBERG