No rate rise before Christmas

By Jenny Ruth

Monday 6th December 2010 2 Comments

Reserve Bank governor Alan Bollard won't be raising rates this week and the weak housing market, developing drought and the Euro crisis mean it's becoming increasingly more likely he'll wait until well into next year before hiking again, economists say.

All 11 economists surveyed by GoodReturns.co.nz expect Bollard to leave his official cash rate (OCR) unchanged at 3%. Bollard raised the OCR twice in June and July, the first upwards movements since mid-2007, but has held it steady since.

"We're not likely to see Dr Bollard pull the trigger any time soon," says Doug Steel at Bank of New Zealand.

He still expects the next hike will come in March, although the risks are mounting it will be later.

"As much as there are risks around, there's also a bit in the pipeline that we can see is going to lift growth through 2011," Steel says.

Tax cuts, buoyant commodity prices and the Rugby World Cup will all boost the economy.

"There's enough there to think the recovery in train, albeit a slow one, is going to pick up."
Dominick Stephens at Westpac, who also still thinks the next hike is likely to come in March, says it will depend on how the data plays out.

Risks on the up side include immigration running stronger than expected, rising business confidence and a better than expected labour market, he says.

At the other end of the spectrum, Annette Beacher, head of Asia-Pacific research at TD Securities, is urging Bollard to drop his tightening bias altogether "in the face of an increasingly fragile recovery coupled with an ongoing strong currency."

Beacher thinks he should have done this back in October but says Bollard has another chance this week to make Christmas a little merrier for New Zealanders.

"Dr Bollard's insistence on keeping the tightening bias is not helping activity or sentiment and is keeping a firm bedrock under the New Zealand dollar," she says.

"Indeed, the housing sector has not only flat-lined but has double dipped." While retail spending had a pre-GST hike boost in September, that was likely only stealing growth from October.

Comments from our readers

On 7 December 2010 at 8:38 am arty said:

Would have to disagree on some points. Housing in Auckland, the biggest market, has not double dipped, it is tracking well. Housing drives debt and we need to save rather than borrow.Presently it makes absolutely no sense to save cash as the after tax return is below true dollar depreciation. Low interest rates never fix an ailing economy - ever, thats proven worldwide. Living within ones income does. Cheap money allows local government,central government and us to easily borrow to live above our means. The real fix is to be competitive selling stuff to produce more income - for all of us. To blame interest rates for not being competitive is simplistic, it is not the answer and further in my veiw low interest rates compound the overspending habit NZ has.

On 8 December 2010 at 1:08 am Steve said:

I entirely agree with arty.