Shadow board opts to hold OCR at 3.5%

Altogether there is 62 per cent support for an on-hold decision, 34 per cent for a lower OCR and only 5 per cent for a higher one. Photo / NZ Herald

Despite booming economy, soaring currency and zero inflation suggest lower interest rates are appropriate.

NZIER's shadow monetary policy board thinks the Reserve Bank should leave the official cash rate unchanged at 3.5 per cent tomorrow but sees a cut as the next best option.

The shadow board is a panel of nine economists or business leaders asked to share out 100 points across possible OCR rates to indicate what they believe is the most appropriate.

Altogether there is 62 per cent support for an on-hold decision, 34 per cent for a lower OCR and only 5 per cent for a higher one.

This represent a higher "easing bias" than in the March survey.

'"Economic activity is robust with recent indicators suggesting the economy is growing at 3 per cent a year, a rate consistent with moderate inflation and moderate levels of interest rates," NZIER principal economist Kirdan Lees said.

"But the exchange rate is soaring and inflation is zero. Even with Auckland house prices continuing to increase too fast, these factors suggest lower interest rates are appropriate and the full shadow board recommendation has a clear easing bias."

ANZ chief economist Cameron Bagrie said the various core measures of inflation were falling and most of them were closer to the bottom than the middle of the Reserve Bank's 1 to 3 per cent target band.

"The Reserve Bank, and bank economists like myself, have been wary of broad-based inflation appearing. It hasn't, and what has is contained to housing alone. Low inflation is being driven by more than transitory factors such as oil and this means current monetary policy thinking needs a rethink."

Bank of New Zealand head of research Stephen Toplis said 3.5 per cent would inevitably prove to be the wrong rate for the times.

"The problem is we can't be certain whether we need a higher rate to stem domestic demand or a lower rate to help offset imported deflation. Only time will tell. Doing nothing would thus seem quite appropriate until there is more clarity."

Former Reserve Bank chairman Arthur Grimes said that on current setting the balance of probabilities was that inflation would pick up to around the mid-point of the target so no OCR change was required.

"A cut could be considered given weak near-term inflation." But financial stability concerns would make this a risky longer term choice.