OCR on hold until March: Economists

Monday 23 July 2012

Benign inflation data, the still strong currency and the fragile global economy are likely to offset any concerns Reserve Bank Alan Bollard might have about the stronger than expected domestic growth data for the March quarter and rising house prices.

By Jenny Ruth

All 13 economists surveyed expect Bollard to leave his official cash rate (OCR) unchanged at its record low 2.5% on Thursday and the earliest they expect him to raise it is in the March quarter next year.

Seven economists are predicting an OCR hike in the March quarter 2013, five expect Bollard to wait until June or July and Peter Cavanaugh at Bancorp Treasury Services now expects Bollard will wait until December next year.

Cavanaugh says the world economy, and the problems weighing it, are unlikely to be solved any time soon.

"There's going to be a long, drawn-out recovery. We're increasingly seeing the world gearing up for that," Cavanaugh says.

"There will be some inflation and growth potential in New Zealand, particularly from Christchurch, but that's a fair way away," he says.

Darren Gibbs at Deutsche Bank says the central bank is likely to treat the strong March quarter growth data "with a degree of caution," especially in light of the large up and downward revisions in recent quarters.

"The global economic picture is likely to remain a key source of concern," Gibbs says. "It seems unlikely that the Reserve Bank will feel any more optimistic about the outlook for political and economic stress in Europe than was the case in June."

American and Asian data has also continued to disappoint.

Christina Leung at ASB Bank says although her bank is still picking a rate hike in March next year because of expectations of slightly stronger inflation than the central bank currently expects, "offshore uncertainty means there is the risk the timing of the OCR increase will be delayed."

The household sector has begun to recover, albeit gradually, with the exception of the stronger housing market, Leung says.

"The extent to which house prices continue to increase and the flow-through effects to wider inflation pressures in the NZ economy, will be an important development to watch over the coming year," she says.

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