Bollard may hold to mid-year timing for OCR hike, start in April

Reserve Bank Governor Alan Bollard will probably wait until April before raising interest rates, say most economists. Photo / Mark Mitchell.

Reserve Bank Governor Alan Bollard will probably wait until at least April before raising interest rates, though officially he may stick to his hinting at a mid-year hike this week.

Bollard will keep the official cash rate at 2.5 per cent this week, according to a Reuters survey. Economists see an increase of 50 basis points by June 30.

After this week's announcement there are three OCR reviews before mid-year - March 11, Apri1 29 and June 10, and only five economists of the 20 surveyed expect Bollard will go in March.

"Most likely the bank will still point to around the middle of the year for when it will begin to withdraw monetary stimulus," said Robin Clements, economist at UBS in Christchurch. "There is little sense that rates need to be 'neutral' anytime soon but, conversely, an 'emergency' OCR looks increasingly inappropriate."

The wild card is timing. "Waiting until the hard evidence is in will be too late," he said in his weekly report.

Fourth-quarter consumer prices fell as Bollard predicted last month and he was at the gloomiest end of economists' forecasts, who on average predicted no change in CPI in the final three months of 2009.

Consumer confidence reached a three-year high in January, though the housing market remains weak and now has a question mark over tax treatment of investments in property from the Tax Working Group.

The kiwi dollar is trading at its lowest level against the greenback since late December and has tumbled almost 3 per cent on a trade-weighted basis in the past two weeks on tepid inflation and doubts about global growth.

Clements raised his forecast for fourth-quarter gross domestic product to 1 per cent from 0.4 per cent. Bollard had predicted a 0.6 per cent expansion in his December MPS. This week's announcement, on Jan. 28, is the 'short-form' release, where he puts out as little as a few pars explaining his decision without holding a press conference.

ASB chief economist Nick Tuffley predicts a 50 basis point hike in April while economists at ANZ Bank see 50 points to the June MPS.The timing of a retreat from emergency, or extraordinary monetary policy measures is occupying central bankers worldwide as the signs of economic stabilisation grow.

"The RBNZ has some time on its side, with the low fourth-quarter inflation outturn keeping pressure for early action at bay," said Tuffley, in a report last week.

The December MPS lifted the central bank's outlook for economic growth, house prices and inflation pressures, he said. "As a result, the bank delivered a hawkish statement, bringing forward its signalled timing of the first OCR" and since then, economic data "has evolved in line with the RBNZ's expectations."