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Home / Business / Economy / Official Cash Rate

Interest rates may stay same - banks

By Tracy Withers
23 Apr, 2007 05:00 PM4 mins to read

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Alan Bollard

Alan Bollard

Will Bollard hold rates? What should he do? >> Send us your views

KEY POINTS:

Resurgent house prices and strong retail spending might point to a rate increase this Thursday, but many economists believe Reserve Bank Governor Alan Bollard will hold fire, at least until June.

Eight of 14 economists surveyed by Bloomberg believe Bollard will keep the official cash rate at a
record-high 7.5 per cent as he waits to see if a rising currency and higher home-loan costs will curb spending and inflation.

Six expect an increase.

Bollard raised the rate on March 8, saying demand for houses and consumer spending must slow to curb inflation.

Home-loan rates have since jumped to the highest in seven years, and the New Zealand currency has risen 15 per cent against the US dollar, giving the Reserve Bank scope to gauge if domestic demand is declining.

"Bollard will want to see how housing and other demand indicators react," said the chief economist at Deutsche Bank in Auckland, Darren Gibbs.

"The bottom line is the Reserve Bank can, and probably will, wait until June before increasing rates again."

Gibbs is one of four economists who expect Bollard to raise rates in June. Another four analysts believe rates will not change this year.

Gibbs said Bollard would leave rates unchanged and indicate that an increase was likely while he waited for more information about the economy, due before the June 7 review.

That includes the first-quarter jobless rate on May 10, the Government's budget and details of business tax cuts on May 17 and reports on retail sales and housing demand for April.

New Zealand's official cash rate is 7 percentage points more than Japan's and 2.25 points higher than the US Federal Reserve target.

Foreign investors borrow at cheaper rates to buy New Zealand assets, buoying demand for the currency, which rose to a 22-year high of US74.91c last week.

The currency's gain will crimp exports, which are 30 per cent of the economy, but will make fuel and other imports cheaper, curbing inflation.

Gibbs said Bollard might be reluctant to raise interest rates because of the difficulties the high dollar is causing exporters.

Sanford, New Zealand's largest publicly traded fishing company, said last week that first-half profit fell because the strong currency was "decimating" earnings and resulting in foreign exchange losses.

And the chairman of the meat section of Federated Farmers, Keith Kelly, said sheep farmers were being "crucified" by the high value of the dollar.

In March, Bollard said he didn't want to "jolt the economy around" and hurt exporters by raising interest rates unnecessarily.

Lenders have increased home-loan interest rates over the past month. The rate from the four biggest banks on a two-year fixed-interest loan rose to 8.9 per cent from about 8.4 per cent in February. Variable home loan rates rose a quarter point to about 9.8 per cent.

"With mortgage rates that high, the skids could go under the housing market in very short order," said Westpac's chief economist, Brendan O'Donovan, in Wellington.

Bollard would not want to lift the rate again before seeing the April housing figures.

Reports over the past month pointed to underlying strength in the economy, which raised the chance of another rate increase, O'Donovan said.

Retail sales rose 1.9 per cent in February, the fastest pace since March 2004, and house sales last month were 9.5 per cent up on March last year.

Companies were more optimistic about their second-quarter trading, said an Institute of Economic Research survey. More planned to raise prices and more said it was harder to find workers, a signal that wages may rise, fanning inflation.

"The run of data has been unfriendly," said First NZ Capital's head of economics and strategy, Jason Wong, who expects a quarter-point increase this week.

By not lifting rates, Bollard risked banks reducing their home-loan rates, Wong said.

WHAT THE BANKS THINK
On Thursday Alan Bollard will:


ANZ National - RAISE
ASB Bank - RAISE
Barclays - HOLD
BNZ - RAISE
Citigroup - HOLD
Deutsche - HOLD
First NZ - RAISE
Goldman Sachs - RAISE
JPMorgan - HOLD
Macquarie - HOLD
RBC Capital Markets - HOLD
TD Securities - HOLD
UBS - RAISE
Westpac - HOLD

- BLOOMBERG

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