Keep cash rate on hold - shadow board

Falling oil prices have pushed inflation down. Photo / NZME.

Panel gives most support for OCR to stay at 3.5%, with the next best option a cut.

NZIER's monetary policy shadow board believes the Reserve Bank should leave the official cash rate on hold at 3.5 per cent tomorrow but that the next best option would be a cut.

The board is a panel of nine economists and business leaders that the Institute of Economic Research asks before the bank's OCR reviews to share out 100 points across possible interest rates to indicate, in a probabilistic way, what they believe is the appropriate setting for the policy rate.

This time there is 62 per cent support for no change, 25 per cent for a lower OCR and 12 per cent for a higher one.

"Many indicators continue to point to a strong economy and Auckland's house prices have reignited," said Kirdan Lees, the NZIER principal economist who set up the shadow board.

But falling oil prices have pushed the inflation rate below the bottom of the Reserve Bank's 1 to 3 per cent inflation target band, and inflation pressures are extremely muted right throughout the economy.

"It's simply hard to find businesses that can pass on price increases to consumers," Lees said. "Dairy price falls and drought conditions will also dampen economic activity in 2015. These conditions lean towards lower interest rates, as some shadow board participants prefer."

ANZ chief economist Cameron Bagrie and Steel & Tube chief executive Dave Taylor both believe the OCR is too high.

"The Reserve Bank has an inflation target and not a growth or a housing one," Bagrie said. "Non-tradeable inflationary pressures are receding rather than accelerating. Material structural forces look to be at work."

The bank would not cut, he said, but its tightening bias needed to go.

Motu economist and former Reserve Bank chairman Arthur Grimes said that while goods markets were showing "approximately zero" inflation, some asset markets were still showing some upward pressure.

"This complicates monetary policy rate-setting but, on balance, a wait-and-see approach to the interest rate level is warranted with no precipitate changes required in either direction," Grimes said.

Victoria University economics professor Viv Hall, a former Reserve Bank board member, said: "More pertinent to this OCR call is that New Zealand's domestic aggregate demand is strong and projected to remain healthy. So, no current case for OCR cuts or increases."