Shadow board founder says easing house price inflation and falling commodity prices suggest respite from rises.
NZIER's monetary policy shadow board recommends the Reserve Bank keep the official cash rate on hold at 3.5 per cent tomorrow but sees the risks surrounding that as equally balanced.
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.
There is 59 per cent support for leaving the OCR at 3.5 per cent but beyond that as much support for a lower rate as for a higher one.
"House price inflation is easing, commodity prices are falling and inflation pressures are moderate," said Kirdan Lees, a principal economist at NZIER who set up the shadow board. "The official cash rate has moved higher in each of the last four reviews. Now it's time to take a break."
Dairy prices in Fonterra's GlobalDairyTrade auctions have fallen 44 per cent since February 2014.
"The exchange rate has eased but only a little. So now the farm-gate price of milk is much lower, taking some demand out of the economy," Lees said. "Interest rates are still well below historical averages. The Reserve Bank has plenty of scope to tighten should inflationary pressures re-emerge, but for now the shadow board recommends leaving the OCR where it is at 3.5 per cent."
Viv Hall, an economics professor at Victoria University of Wellington and former member of the Reserve Bank board, said interest rates were still below neutral, and non-tradables inflation pressures remained material.
"But real GDP growth rates have probably peaked, global demand is potentially more uncertain, and signals from domestic data are somewhat mixed. In the context of recent OCR increases, it's therefore appropriate to wait for a clearer picture from trend influences on inflation rates."
ANZ chief economist Cameron Bagrie believes the Reserve Bank "overcooked things" when it delivered the last, and fourth successive OCR hike in July. "But 25 basis points is hardly ruinous."
The bank should be pleased with the traction the rate hikes it had delivered so far had had, he said.
"The economy is on a moderating trajectory with the OCR hikes and falling commodity prices having an impact on sentiment."
But Auckland University professor of macroeconomics Prasanna Gai sees a strong case for interest rates to come closer to more neutral levels as soon as possible and while the international environment remains benign.
The economy's output had been running ahead of its potential or sustainable rate and non-tradables inflation close to the top of the Reserve Bank's 1 to 3 per cent inflation target band. Those factors continued to point to upside risks to the inflation outlook, he said.
"A slightly higher interest rate will also further temper house price inflation."