Market awaits clues from Bollard

Reserve Bank Governor Dr Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard is universally expected to leave the official cash rate at 2.5 per cent when he reviews it on Thursday but the brief accompanying statement will be dissected for clues as to when the next hike in rates is likely to come.

Current money market pricing implies about a 65 per cent chance the OCR will be raised before the end of the year - by no means a done deal, but more likely than not.

A large majority of market economists, on the other hand, are picking the March quarter next year, though the minority picking December include the ANZ and BNZ.

Since Bollard cut the OCR by 50 basis points on March 10, explicitly to bolster confidence in the aftermath of the February earthquake, monetary conditions have tightened via the exchange rate. On a trade-weighted basis the kiwi dollar has appreciated by more than 5 per cent.

Underpinning that are export commodity prices hitting new highs. The ANZ commodity price index is up 30 per cent on a year ago in world price terms and 24 per cent in New Zealand dollar terms.

On the domestic front the housing market is showing signs of life, especially in Auckland.

The number of properties sold in Auckland last month was 11.4 per cent up on March last year, though the nationwide increase (excluding Canterbury from both totals) was 1.5 per cent. The median price in Auckland was 1.8 per cent up on a year ago, but nationwide it was 1.8 per cent lower.

Indicators of consumer spending are mixed, however. Consumer confidence is flat and weak, but electronic card transactions last month picked up. Credit growth is weak in all the major sectors: households, business and agriculture.

ASB chief economist Nick Tuffley said that in this context, when households and firms were still focused on debt reduction, the Reserve Bank would see no immediate need to lift interest rates.

However Bollard in a recent speech said that a structural increase in the terms of trade could generate increased inflation pressures - if households and firms used the income gain to bring forward consumption and investments or increase borrowing.

"The speech implies a warning that once confidence increases and there are signs of activity and credit growth recovering, particularly in the agricultural sector, the Reserve Bank will be inclined to withdraw monetary stimulus," Tuffley said.

"This reinforces our view that interest rates are likely to increase relatively quickly once the Reserve Bank sees recovery in the underlying economy over 2012."

Goldman Sachs economist Philip Borkin said that Thursday's statement might acknowledge tentative signs of improvement but its nuances were likely to indicate the central bank was in no real hurry to begin tightening again.

Its March statement had said, "the current monetary policy accommodation will need to be removed once the rebuilding phase materialises".

Borkin said reconstruction in Christchurch might start late this year but was more likely to be a 2012 story.

Meanwhile last week's consumers price index indicated underlying inflation is still well behaved.

"Outside of petrol, food and a tobacco excise hike, inflation actually fell in the March quarter," Borkin said.

And in contrast to the last time the Reserve Bank was tightening aggressively, in 2007, it ought to get plenty of traction when it did come to tighten.

About half of mortgages by value are now on floating rates and another 28 per cent are due to roll off fixed rates within the next 12 months.