Reserve Bank likely to keep OCR steady

The Reserve Bank is expected to leave both its official cash rate and its message unchanged when it delivers its monetary policy statement on Thursday.

The OCR has been at an historic low of 2.5 per cent since last April and the financial markets think it will be April next year before Governor Alan Bollard starts raising it again.

Before the last OCR review in October they had become enthusiastic about an earlier start to the tightening cycle, prompting a not-so-fast signal from the bank: "We see no urgency to begin withdrawing monetary policy stimulus and we expect to keep the OCR at the current level until the second half of 2010."

Similar language is expected on Thursday.

When the tightening does come it is expected to be fairly swift. The most recent Bloomberg poll of 12 market economists put the median forecast for the OCR by the end of June at 3.25 per cent, 75 basis points above where it is now, and 100 points higher than that by the end of next year.

For the outward-facing parts of the economy the news in the past six weeks has generally been good.

Consensus forecasts for growth among New Zealand's trading partners continue to be revised higher. For next year and the remains of this year they are a cumulative 1.1 percentage points higher than they were at the time of the last full monetary policy statement in September.

"The largest upward revisions by far have been for Australia and Southeast Asia," said Westpac economist Michael Gordon, "and China is expected to keep steaming along at well in excess of 8 per cent annual growth."

On a trade-weighted basis the kiwi dollar has eased 5 per cent since the last official cash rate review in late October.

On the home front, house prices have recovered to within 3 per cent of their all-time highs two years ago.

In last month's financial stability report the Reserve Bank returned to its theme of an unbalanced recovery: "We need to ensure there is no return to a debt-fuelled housing cycle which would likely bring with it further exchange rate pressures and erosion of competitiveness."

ASB economist Jane Turner said a continued surge in house prices would test Bollard's patience.

New Zealanders were once more willing to borrow money to bid up house prices, when prices and debt levels were already high relative to incomes, she said.

Westpac is more sanguine: "We see this as a 'mini-boom' to the extent that it has been seen more in prices than in turnover and is largely a response to short-lived demand factors - low mortgage rates and rising net migration - and a shortfall in new home-building activity," Gordon said.

"While it is true rising prices will go some way towards boosting consumer spending, households have shown no sign of returning to their bad old ways of debt-fuelled consumption."

Surveys of business and consumer confidence are at high levels, but there is little sign yet of people following through with spending.

Deutsche Bank chief economist Darren Gibbs said credit growth remained weak, especially in the business sector, with many households and firms, at least at this stage, choosing to continue to pay down debt.