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Last OCR review for 2013 to keep rate at 2.5 percent , link timing of moves to exchange rate, housing

Monday 9th December 2013

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Reserve Bank governor Graeme Wheeler is expected to leave the official cash rate unchanged in his final review of 2013, while giving financial markets little reason to change their view that the tightening cycle will start in the first quarter.

By March the OCR is expected to be at 2.75 percent, rising to 3 percent in the June quarter and to 3.5 percent by the end of 2014, according to a Reuters survey.

In the RBNZ's last six-weekly review, on Oct. 31, Wheeler said OCR increases "will likely be required next year," with the extent and timing dependent on the degree that housing and construction pressure spill over into general inflation and broader demand. He also flagged likely increases in his September monetary policy statement.

Wheeler is likely to make further comment on the impact of curbs on high LVR lending, a policy now in its third month, and over which real estate agents have been divided on whether it is biting. A new central survey last month found high loan-to-value ratio loans fell to 11.7 percent of total new mortgage lending in October, from 25.5 percent in September.

Ahead of the monetary policy statement, data on property values, house prices and sales volumes for November are due for release.

"The housing data will also be of interest but we still expect the RBNZ to conclude in its MPS that it is 'too early' to judge the impact of the high-LVR restrictions," said Robin Clements, senior economist at UBS New Zealand. "We expect the MPS to leave consensus expectations for a March hike intact."

Nevertheless, Clements says the RBNZ made "a clear shift towards a more hawkish bias" in September and hasn't done anything since to change that position.

Changing the mix from the September MPS has been the high New Zealand dollar, which was at 77.77 on a trade weighted basis on Friday and hasn't yet tested as low as the 74.7 level the central bank had forecast it to average this quarter.

The kiwi is at a five-year high against the Australian dollar, giving New Zealand more buying power across the Tasman while making local goods appear more expensive.

Traders speculate that the kiwi will continue to outpace the Australian dollar because local interest rates are expected to rise faster and further than those ordered by the Reserve Bank of Australia. Business confidence is near a 15-year high and consumer confidence is the highest in more than 3 ½ years.

But Wheeler is likely to be wary of the impact hiking rates could have in driving demand for the currency, especially given the Federal Reserve doesn't look to be rushing to end its US$85 billion a month bond buying programme.

"The RBNZ will acknowledge that the balance of conditions has changed - the economy is stronger, but the exchange rate is higher than previously anticipated," said Dominick Stephens, chief economist at Westpac Banking Corp.

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