Economists see little to disturb the upbeat view last month of Graeme Wheeler that the economy is in a strong position. Photo / Chris Gorman
Economists see little to disturb the upbeat view last month of Graeme Wheeler that the economy is in a strong position. Photo / Chris Gorman
Reserve Bank tipped to repeat January advice that rate will stay put for some time.
The Reserve Bank is expected to keep the official cash rate unchanged at 3.5 per cent on Thursday and to repeat its guidance in January that it expects to keep the OCR on hold for some time and that the next move could be either up or down.
The JanuaryOCR review saw a shift in the bank's stance from a tightening bias to neutral.
Economists see little in the flow of economic data since then to disturb the view expressed by governor Graeme Wheeler early last month that "the economy is in a strong position with continued steady growth, falling unemployment, and inflation at low levels".
The drivers of growth looked sustainable, he said, particularly in light of the increase in productive capacity over recent years.
Money market pricing implies an expectation of an OCR cut before the year is out. But market economists surveyed by Reuters are more cautious, with the median forecast a rate hike by the middle of next year.
Wheeler in his speech last month outlined the main factors the bank will be watching.
The first is China, crucial to the export outlook both directly and via its impact on other trading partners, especially Australia. Its growth rate has slowed but the People's Bank of China has responded by cutting interest rates.
Second is dairy prices. So far this year they have retraced some of last year's precipitous fall, but partly that reflects a drought that has yet to really break. Some indications from the market suggest the bounce in prices may have done its dash, said ANZ economist Sharon Zollner.
And prices for other export commodities have either trodden water or declined recently.
On the other side of the trade accounts, oil prices have also rebounded somewhat after a steep plunge last year.
The short-term impact on the inflation rate is something the Reserve Bank would "look through" for monetary policy purposes.
Lower prices at the pump also boost households' spending power on other things, but it is only a partial offset to the reduction in national income from the fall in dairy prices.
And there is scant sign in other data of any return to the spendthrift behaviour of the mid-2000s boom, which saw inflation threaten even the most liberal interpretation of the Reserve Bank's inflation mandate and the OCR pushed up to 8.25 per cent.
Graeme Wheeler.
December quarter retail sales data showed prices lower in 11 of the 15 store types and the overall increase in spending running within the bounds of household income growth.
The exception is Auckland where spending was up 11.1 per cent on a year earlier - more than could be explained by the city's disproportionate share of population growth. It could be an early sign of the wealth effect kicking in, where homeowners see house price inflation push up the value of their equity and go out and spend a few cents in the dollar of that increase in paper wealth.
So the fourth item on the Reserve Bank's watch list is the housing market, especially in Auckland where prices are rising at double-digit rates.
"Pressures in the housing market are expected to prompt some tightening in macro-prudential policy over the course of this year," said Westpac economist Satish Ranchod.
The consultation paper the Reserve Bank released last week on how to define residential property investment loans for capital adequacy purposes included the cautionary comment that it was "partly to facilitate the introduction of a macro-prudential property investor policy, should that become necessary".
Finally the bank is, as ever, mindful of the exchange rate which has been running higher, on a trade-weighted basis, than the bank assumed in its December forecasts.
ASB chief economist Nick Tuffley sees no chance of an OCR rise for the foreseeable future and puts a 25 per cent probability on the Reserve Bank cutting the policy rate.
"Essentially it would be likely to cut the OCR if it loses confidence that inflation will sustainably return to the 2 per cent target mid-point without further interest rate stimulus."
Keeping watch *China: Crucial to the export outlook. *Dairy: Prices have retraced some lost ground. *Inflation: Spending rise overall within income growth. *Housing: Auckland prices rising at double digit rate.
