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Some economists not sure a rate rise is wise

Jenny Ruth

Monday 24th October 2005

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Jenny Ruth
Most economists are expecting Reserve Bank governor Alan Bollard will raise interest rates on Thursday although not all are convinced of the wisdom of doing so.

They expect Bollard will raise his official cash rate, which directly affects floating mortgage rates, from 6.75% to 7% after months of threatening to do so. The OCR has been steady at 6.75% since March.

Cameron Bagrie at ANZ/National Bank isn't among the doubters. "The key issue isn't whether we get one (a rate hike) on Thursday, but whether we get a successive one in December," he says.

Bollard's warnings over recent months have largely been ignored and now it's time for "tough love."

With a massive current account deficit and a still booming housing market, "the inflation genie looks like it could get out of the bottle," Bagrie says.

Inflation jumped 1.1% in the September quarter, bringing the annual rate to 3.4%, breaching Bollard's zero to 3% target.

Darren Gibbs at Deutsche Bank also thinks a rate hike is warranted and notes that the wholesale market is already pricing in a 60% chance of a further hike in December. The June 2006 90-day bank bill futures contract has jumped from 6.75% on September 15 to 7.3%.

"I don't think it's very healthy the way the economy's growing at the moment and they need to take further pressure off the housing market," Gibbs says.

But Robin Clements at UBS Warburg argues that further rate hikes are probably not necessary.

Despite the breach of Bollard's inflation target in the September quarter, Clements doesn't think it added any weight to the case for further rate hikes, "at the margin, likely the opposite." The inflation outcome was slightly below the Reserve Bank's and the market's expectations.

Nevertheless, Bollard's recent speech in which he said maintaining inflation within his target was "particularly challenging because of household spending, oil price rises and the prospect of a more expansionary fiscal policy" practically ensures a rate hike this week.

"To not hike again would be a major shock and leave the market extremely confused about the mixed messages," Clements says.

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