Bollard to leave rates unchanged next week, say economists

ASB economists are predicting the Reserve Bank to hold official interest rates steady at 2.5 per cent when it makes a decision next Thursday.

In an outlook published today, bank chief economist Nick Tuffley also raises the possibility of the Reserve Bank looking for other tools to try and get interest rates lower, as adjustments to the OCR lose their effectiveness.

"We expect the Reserve Bank will keep the Official Cash Rate (OCR) on hold at 2.5 per cent next week. The Reserve Bank is very close to the end of its easing cycle: its reluctance to cut the OCR below 2.0 per cent leaves only 50 basis points of potential rate cuts up its sleeve," said Tuffley.

"Now is a good time to pause and assess the impact of monetary stimulus to date. The RBNZ is likely to be uncomfortable with current levels of the New Zealand dollar and longer-term fixed interest rates. However, current market forces are likely to limit the impact of an OCR cut at the minute: there may be better opportunities in the future."

Tuffley said additional monetary stimulus was likely to be needed further down the track. "The OCR remains the Reserve Bank's main tool of choice, but once the OCR is at 2 per cent the bank may have to consider alternative options."

Tuffley said the Reserve Bank was likely to be reluctant to use other options to get interest rates down - "But the wildcard risk for the day is some action is taken to try and drive interest rates and the exchange rate lower."

Since starting its "easing cycle" in July 2008 the Reserve Bank has slashed 5.75 percentage points off the OCR, including the dramatic 150 basis point cuts in December and January. The OCR now sits at 2.5 per cent - leaving the RBNZ with just 50 basis points worth of cuts up its sleeve.

Darren Gibbs, Deutsche Bank economist also thinks Alan Bollard will keep the Official Cash Rate at 2.5 per cent.

"Whilst the Reserve Bank will have to acknowledge the improvement in seen in global financial markets and leading economic indicators in both NZ and offshore, the Bank will maintain a strong easing bias, not least due to continued strengthening seen in the NZ Dollar. We would be surprised if the RBNZ did not express discomfort with the NZ Dollar explicitly," said Gibbs.

The continued easing bias will be communicated most obviously by "repeating the key final two sentences" from the bank's last Monetary Policy Statement which said… " We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters."

Gibbs said that he thought that the Reserve Bank's monetary policy stance may already have been a little too easy and thus "at the margin contributing to the recent rise in longer-term interest rates and the exchange rate".

The ASB's Nick Tuffley said the Reserve Bank was "unlikely to be comfortable with where the currency and longer-term interest rates are currently sitting, and normally we would argue for the Reserve Bank to cut the OCR to help reduce the upward pressure in these markets."

April's 50 basis point cut in the OCR had very little lasting effect against offshore influences, so "it's hard to imagine a 25 basis point cut will have much impact.

"We expect the Reserve Bank will keep the cash rate on hold in June. Now is a good time to pause and assess the effectiveness of rate cuts to date, as right now further OCR cuts will achieve little. There have been some promising signs on the economic outlook, although there is a long way to go yet," said Tuffley.

"Right now the RBNZ would effectively achieve as much from cutting the OCR as leaving it on hold, yet use up some OCR ammunition that could be more effective at a future date."


- NZ HERALD STAFF