Wednesday 28th September 2005
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After the central bank's last review of its official cash rate (OCR) on September 15, ANZ was saying that while their was still a chance of a rate hike, the most likely next move was going to be down, although not before mid-2006.
Now ANZ expects the OCR will rise from 6.75% currently to 7% on October 27 and that there's a material risk of a further hike in December.
While the economy has slowed from a gallop to a canter, "the deceleration is not enough to ward off that inflation bogie," says ANZ economist Cameron Bagrie.
As well as that, Reserve Bank governor Alan Bollard has repeatedly warned at June, July and September OCR reviews about the need for higher rates.
"If the existing set of circumstances isn't sufficient to justify rates rising - it's time to poo or get off the potty. You can't repeatedly bark like that and warn about higher rates and not follow it up. Their credibility is going to be tested," Bagrie says.
The New Zealand dollar has declined from threatening 75 US cents in March to 68.2 cents currently.
That decline will provide even more of an inflationary threat which the September quarter inflation figures are already set to be strong, he says.
"The picture at the moment is very dichotomised. We've got slowing growth but rising inflation." Ultimately, it will be inflation that most motivates Bollard because that is what he is mandated to control, Bagrie says.
Wholesale interest rate markets are pricing in a high chance of an October rate hike with the December 90-day bank bill futures implying a 7.21% yield.
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