Economists split on OCR this week

Monday 8th March 2004

Economists are divided as to whether Reserve Bank governor Alan Bollard will raise rates again when he releases his latest monetary policy statement on Thursday, but most think it will be a close call.

Bollard surprised the market in January when he raised the official cash rate (OCR) from 5% to 5.25%, citing stronger than expected household spending and activity in the construction and housing market.

Now, ANZ Bank thinks he will follow that up by raising it to 5.5%, although it says the strong New Zealand dollar could make this a close call.

"But given the absence of conclusive signs that momentum in domestic activity is yet waning to a significant extent, we believe that the Reserve Bank will seek to further ensure that domestic inflation pressures do not get out of hand," ANZ says.

ASB Bank, however, thinks the central bank will hold off until it sees more evidence of whether or not the economy is slowing.

"We do not believe the data have been sufficiently strong enough to offset the continued appreciation of the New Zealand dollar. Recent data suggest the economy is still operating at healthy levels but the momentum may be waning," ASB says.

Westpac says it's like tossing a coin. "We have been worried that the coin may come up heads, while we would rather the Reserve Bank would think with their heads," it says. It hopes the central bank "will see sense and not raise rates," arguing this is the "path of least regret." While there is a risk inflation may breach the 3% target and of a housing bubble, there's also a risk the economy will implode, it says. But the dollar's drop in recent weeks from near 71 US cents to the 67.50 cent level may be enough to convince Bollard otherwise.

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