By Brian Fallow
WELLINGTON - Economists expect the Reserve Bank to leave its official interest rate unchanged in Wednesday's monetary policy statement, despite the recent strength of the kiwi dollar.
The economic data since the bank's last quarterly statement have been broadly consistent with its forecasts then, with signs of stronger domestic consumption offset by a weaker short-term outlook for net exports.
Reserve Bank governor Don Brash said in March he saw no need of a material change in the monetary policy stance for "some quarters ahead" and private-sector economists are not expecting this week's statement to disturb the prevailing view that a rise in the official cash rate is at least six months away.
In terms of the old monetary conditions index, the rapid appreciation of the kiwi dollar in recent weeks means conditions are already about 225 points tighter than the average level the bank assumed for the second half of this year.
Despite that the chances of an offsetting cut in interest rates are discounted by analysts.
The currency's rise reflects a turnaround in international investor sentiment towards the "commodity" currencies, including the New Zealand dollar.
So far, however, the recovery in commodity prices is modest and more apparent in commodities, like oil, which New Zealand imports than those it exports.
ANZ chief economist Bernard Hodgetts said until the dollar's rise was matched by a rise in relevant export commodity prices, it represented a loss of export competitiveness which had the potential to thwart a recovery, so far fragile, in the export sector.
But an offsetting cut in interest rates, from what are already historically low levels, would risk fuelling re-emerging domestic inflation pressures, Mr Hodgetts said.
WestpacTrust chief economist Bevan Graham said that, given the premium the Reserve Bank put on interest rate stability and the fact that it believed we were now in the early stages of the tightening phase of the cycle, it would be reluctant to move the cash rate down. Weaker economic data or a stronger dollar would simply suggest it would be longer before the cash rate was raised.
Bankers Trust chief economist David Plank said the impact of a higher currency on the medium-term growth outlook was what mattered for the Reserve Bank.
"And on that score we think there is little evidence the rise in the currency has significantly subtracted from New Zealand's growth prospects."
No rate change forecast
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