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Home / Business / Economy / Official Cash Rate

Official cash rate set to be left unchanged

By Eloise Gibson
19 Jan, 2008 04:00 PM3 mins to read

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KEY POINTS:

Homeowners are likely to escape an interest rate rise this week, despite inflation breaking the upper limits of the central bank's benchmark range.

Statistics New Zealand has announced that the annual inflation rate, as measured by the consumer price index (CPI), jumped from 1.8 per cent in the
September quarter to 3.2 per cent in the December quarter.

The Reserve Bank, which has a target band of 1 to 3 per cent inflation, will announce on Thursday whether it will change the official cash rate (OCR) to try to stall inflation. An increase in the cash rate would further push up the cost of borrowing.

Economists say the central bank is unlikely to raise the cash rate any further, but some are warning interest rate cuts may be a long time coming.

UBS New Zealand economist Robin Clements is the most optimistic, predicting the bank will cut the OCR in June.

Clements says the news is not all bad, despite December quarter inflation being higher than expected. One of the big factors fuelling inflation, housing price increases, is down quite sharply on the previous quarter and below the average increase over the past five years.

Clements says it is unlikely the Reserve Bank will raise the cash rate while there is a risk of the US slipping into a recession.

"We could be facing a stagflation scenario, where inflation is not looking good but growth is pretty soft, and in that situation I think doing nothing is probably the best option."

ANZ chief economist Cameron Bagrie says inflation figures paint a mixed picture.

Non-tradable inflation turned out to be lower than expected, but the headline rate was higher.

He predicts the bank will hold the cash rate where it is for much of this year.

Bagrie says the Reserve Bank has probably already done enough to bring house prices down, so further OCR rises are unlikely. "They can't afford to relax their inflation guard, but I don't think that there's any reason to panic."

But he warns those hoping for interest rates to fall should be careful what they wish for.

"If the Reserve Bank is having to cut rates, it will be because this economy is really struggling," says Bagrie.

Those waiting for the cash rate to drop will be hoping Westpac chief economist Brendan O'Donovan is wrong.

He has predicted the bank will raise the OCR later in the year to contain the inflationary effects of higher fuel prices.

Petrol was the single biggest culprit behind the CPI increase for the December quarter, with transport prices rising 3.2 per cent, driven mainly by rising petrol prices.

Food prices rose 1.5 per cent, mainly because of higher prices for grocery food, especially cheese, butter and fresh milk.

Housing and household utilities prices rose 0.9 per cent, driven by higher prices for purchase of new housing, while prices for recreation and culture increased 1 per cent, driven by package holidays.

Council of Trade Unions economist Peter Conway says the combination of higher food and petrol prices, and a lift in mortgage interest rates, mean workers are feeling the pressure of rising costs. He says higher grocery prices are particularly tough on low-income families.

The quarterly CPI rise of 1.2 per cent was higher than expected. Private sector economists had forecast the quarterly rise at 1 per cent and an annual rate of 3 per cent.

The Reserve Bank had forecast a 1.1 per cent rise and an annual rate of 3.1 per cent.

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