OCR hike may come with more cautious projections

Monday 26th July 2010 3 Comments

Reserve Bank Governor Alan Bollard is expected to raise the official cash rate this week while acknowledging that the pace of economic growth has been less than projected.

Bollard will raise the OCR a quarter point to 3% on July 29, according to all 20 economists in a Reuters survey. By March 31, he will have raised the benchmark rate to 4%, the survey says, heading back to normalised levels after the extraordinary stimulus in place since April last year when he cut the OCR to a record low 2.5%.

The RBNZ tightened monetary policy for the first time in three years on June 10. Since then data has shown the economy expanded 0.6% in the first quarter, less than the bank’s 0.8% forecast, while the housing market and consumer spending have remained weak, and net migration has weakened.

Casting a pall on the global outlook, Federal Reserve chairman Ben Bernanke said the path of the US economy was “unusually uncertain” and China’s GDP growth has slowed, with signs Beijing may do more to cool demand, while prices of New Zealand commodities such as milk powder have weakened in recent months.

“A string of disappointing domestic data and also evidence of waning global momentum warrants caution in our eyes,” said Philip Borkin, economist at Goldman Sachs JBWere, in a note.

“For an economy that has been reliant on the strong global backdrop as a driver of the recovery to date, this is something that could spell a more challenging period ahead.”

Also challenging for the RBNZ is to make a call on the extent to which short-term effects of increased government levies and imposts, such as the costs of the Emissions Trading Scheme, GST hike and ACC charges will feed through into broader inflation expectations.

Inflation is expected to spike to over 5% in the first quarter of 2011 though Bollard has said he sees little ongoing impact, with the GST increase softened by tax cuts. Still, business surveys shows firms are preparing to raise prices and the extent of second-round impacts isn’t clear yet.

The effect of government charges won’t start to show up until the third quarter, and consumer prices rose less than expected in the three months ended June 30 at 0.3%.

Annual inflation eased to 1.8% from 2%. Economists at ASB expect the RBNZ will continue to raised interest rates “in a steady fashion” until the OCR reaches 5% next year.

“There remains a clear risk that inflation expectations will become unanchored further down the track,” ASB economists led by Nick Tuffley said in a report. The increase in pricing intentions “does highlight the key challenge the RBNZ faces in ensuring price and wage setting behavior will be unaffected.”

Bollard noted signs of a favourable rebalancing of the economy in last month’s statement, citing the outlook for higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment.

The current account deficit has narrowed to just 2.4% of GDP, helped by an improved trade position, and the improvement in the outlook for exports has helped stoked confidence among manufacturers.

Manufacturing expanded for a tenth straight month in June, according to the BNZ-Business NZ performance of manufacturing index, which rose 2.2 points to 56.2.

Retailing, though, remains fragile, as evidenced by the incessant High Street discounting. Core retail sales fell 0.2% in May, and total sales growth of 0.4% may only reflect a pre-GST hike spend-up on automobiles and major appliances.

As Bollard noted in last month’s statement: “We expect households to remain relatively cautious, with the housing market and credit growth staying subdued.”

Businesswire.co.nz

Comments from our readers

On 26 July 2010 at 1:03 pm g murphy said:

once again rates going up when our economy is still in a fragile state. could the rate hike be, because aust is 4.75% and we need to compete to attract overseas investors. way to go rbnz screw everybody in nz. bright spark.

On 27 July 2010 at 10:47 am Craig said:

I agree with Murphy were not out of the woods yet and RBNZ think we can recover as quick as other countries "Year Right"

On 27 July 2010 at 3:08 pm howcome said:

what? wrong, 1) AUS OCR is 4.50% 2)if OCR= Expected Inflation + Really GDP, how come to compare with AUS now, how about NZ current econony? 3) anyone borrow AUS dollars to buy house?