All eyes on Bollard for date to raise OCR

Alan Bollard. Photo / Mark Mitchell

No change in the official cash rate is expected on Thursday, so the focus will be on whether the accompanying statement indicates any change from the Reserve Bank's statement last month that it expects it to be "around the middle of 2010" before it starts to tighten.

The markets don't think so.

Economists see the run of economic data since the bank's December statement as very much in line with its forecasts then and as giving Governor Alan Bollard time to await more evidence that the recovery is robust enough to handle the withdrawal of monetary policy support.

Reuters' most recent poll of 20 economists found nine picking that Bollard would start raising the OCR in late April, seven picking June and four March.

Money market pricing sees only a small chance of a March start and April as more likely than not but by no means in the bag.

By the end of June economists' median forecast is for the OCR to be at 3 per cent (up from 2.5 per cent now). By the end of the year it is expected to be 4.25 per cent. A de facto tightening is already under way.

Not only is the dollar high, longer-term wholesale rates have risen back closer to their long-run averages, pushing up fixed-term mortgage rates with them.

Although the OCR is at an all-time low, banks' cost of funds is 100 to 150 basis points higher than the OCR and a wide gap remains between the OCR and the retail rates borrowers face.

"The year has started with mortgage rates already moving up, which will only extend the softening seen in housing from late last year," said ANZ National Bank economist Khoon Goh.

Deutsche Bank chief economist Darren Gibbs said that after adjusting for seasonal effects the number of houses sold had fallen for three straight months, and house prices in December (as measured by the REINZ index) had fallen 0.9 per cent, after a modest 0.2 per cent rise in November. In addition, growth in household debt has been subdued.

December-quarter inflation came in bang on the Reserve Bank's forecast of a 0.2 per cent fall in the consumers price index overall.

"Non-tradables inflation - the stubbornly persistent component through much of the last decade - was softer than they expected, just 0.1 per cent," said Westpac economist Michael Gordon.

"However any cheer on this front may be dampened by the fact that housing construction costs accelerated. Both we and the Reserve Bank expect a strong rebound in housing construction this year and the idea that cost pressures are re-emerging this early in the game should be of some concern."

The NZ Institute of Economic Research's quarterly survey of business opinion recorded continued improvement in confidence.

The outlook for household spending would depend on the labour market, Goh said.

Official data for retail spending in December have yet to be released, but electronic card transactions numbers suggest a moderate improvement.

ASB chief economist Nick Tuffley said there was nothing in the recent data to prod the Reserve Bank to move as early as this week, or March.

"We continue to see April as the likely time to move."