Support grows for Reserve Bank to raise OCR

The NZIER shadow board believes the Reserve Bank should leave the official cash rate on hold at 2.5 per cent when it reviews it tomorrow, but only just, with increasing support for a rise as the next best option.

The shadow board is a panel of nine economists and businesspeople the New Zealand Institute of Economic Research asks what levels the bank should set its policy interest rate at.

In the latest poll the board has a 55 per cent preference for keeping the OCR on hold, as the markets are confident the bank will, down from 61 per cent in the October poll, but now there is 43 per cent support for raising the rate, up from 34 per cent last time.

"Higher rates may well be justified because the economy is strengthening - fuelled by the Canterbury rebuild, rising asset prices and consumer confidence," said Kirdan Lees, a senior economist at NZIER and architect of the shadow board.

"Offsetting some inflationary pressures is the rising exchange rate," Lees added.

"Reserve Bank restrictions on high loan-to-value lending may also help reduce inflation but it will take some time for the full impact of the new policy to work through the economy."

Bank of New Zealand head of research Stephen Toplis said the Reserve Bank had indicated in September it would not be raising the OCR until the June quarter next year.

"In October it implied the strengthening New Zealand dollar might further delay that. We think they are wrong and that the accumulating evidence of a broad-based expansion requires tighter policy now."

Nevertheless the BNZ, with most market economists, is picking governor Graeme Wheeler will wait until March next year to start raising rates.

Scott Gardiner, executive director of MYOB, would rather the Reserve Bank maintained current levels to protect the economy's "green shoots".