Interest rate unlikely to be lifted, but review will give clues

Reserve Bank Governor Alan Bollard could overheat or under-stimulate the economy with a change in the OCR. Photo / Mark Mitchell

The language of the Reserve Bank's official cash rate review on Thursday will be minutely dissected for clues about whether the next review, on June 10, is expected to mark the start of a series of interest rate rises.

Economists regard it as all but certain that Reserve Bank governor Alan Bollard will leave the official cash rate unchanged at 2.5 per cent, where it has been for the past year.

But a Reuters poll of 17 forecasters found 13 expect him to start raising the OCR in June.

Swaps market pricing, on the other hand, influenced by some softness in the most recent data, puts the odds of a June move at less than 50:50.

However, economists argue that the flow of data overall is in line with what the Reserve Bank expected in its March monetary policy statement, when it reiterated it would start tightening around the middle of the year.

The international outlook has improved, especially for east Asia and Australia, which account for nearly half New Zealand's trade.

The International Monetary Fund has just revised up its outlook for world growth this year.

Export commodity prices, as reflected in ANZ's index, are at record highs (for the 24-year history of the index) even when converted into New Zealand dollars.

"Drought conditions in many parts of the country are a concern for our dairy exports - and are partly responsible for the higher prices - but one small mercy is that this has come at the tail end of the season," Westpac economist Michael Gordon said.

"Total output looks to be on a par with last season and industry-wide revenue will be about $1.4 billion higher."

And exporters of manufactured goods are enjoying the most favourable exchange rate with Australia - their biggest market - for more than nine years.

On the home front, the data on consumer spending has been mixed.

Retail sales in January and February were weak but electronic card transactions last month were strong and surveys of consumer confidence are solid.

"Banging the drum about consumer weakness ignores the fact that the main drivers of growth are elsewhere: goods-producing sectors such as agriculture and manufacturing have been taking up the baton," Gordon said.

Deutsche Bank chief economist Darren Gibbs said both house sales and credit growth continued to be subdued, although the downward pressure on house prices evident earlier in the year appeared to have dissipated.

Business spending on plant and machinery climbed in the December quarter.

"And business survey measures of capital spending intentions have improved a little since, although a vigorous recovery in business spending still seems some way off," Gibbs said.

ASB economist Christina Leung said central banks faced two key risks when contemplating a lift in interest rates, which took up to two years to have their full impact on inflation.

"One is the risk of lifting rates too soon, choking off an economic recovery before it fully takes hold. The other is waiting too long, leading to an overheated economy and soaring inflation - and a marked tightening in monetary policy," she said.

"The April statement should start to give some - but not many - clues as to which of those risks seems greater to the Reserve Bank. In particular, we will be looking for how much more concern the bank expresses about inflation, relative to how much weight it gives to drought and signs the household impetus may be waning."