By BRIAN FALLOW
Reserve Bank governor Dr Don Brash is expected to bark but not bite this morning, leaving interest rates unchanged but taking a cautionary view of inflation and monetary policy.
In a recent survey of 16 market economists, only two expected Dr Brash to raise the official cash rate today.
Nine
more, however, expected a 25 basis-point rise before the year is out, in December more likely than October, while the remaining five thought the tightening cycle had already peaked.
WestpacTrust chief economist Adrian Orr said the stimulatory level of the dollar pointed to further interest-rate rises in the next six months.
But because of the recent weakness of the domestic economy and the uncertain outlook, the Reserve Bank would opt to watch, worry, wait and warn, he said.
Economists expect the bank to revise its GDP growth profile, with less growth this year but more next year, and the following year the target for monetary policy.
Domestic spending has been hit by feeble business and consumer confidence, a fall in employment and the expected correction in the amount of home construction.
"On the export front, although a competitive exchange rate, rising commodity prices and good growing conditions have seen export revenues rise, this has yet to filter strongly into the larger metropolitan areas," said Mr Orr.
While the weaker-than-expected domestic economy implies less inflation pressure and a more subdued outlook for interest rates, it is offset by the continuing weakness of the New Zealand dollar.
The kiwi crept back above US45c yesterday, but on a trade-weighted basis is more than 9 per cent lower than the Reserve Bank estimated for the second half of 2000, keeping the squeeze on importers' margins.
"A sniff of improved demand conditions could see pent-up price pressures passed on to consumers," Mr Orr said.
At the same time, the bank would be concerned if shortages of skilled labour and stronger bargaining power from the Employment Relations Act lifted wage demands.
Westpac expects the Reserve Bank to project 90-day interest rates, a key source of funding for mortgages, "comfortably above" 7 per cent by early next year, but not as high as the 7.5 per cent the bank projected in May. Ninety-day rates were 6.8 per cent yesterday.
