Meaty chunks off the table

Predictions for an OCR hike have jumped from April to June and now economists are tempted to push this out to July because of softening data.

Tuesday, February 23rd 2010, 5:09PM

by Jenha White

ANZ Market Focus says it has resisted the temptation to push OCR expectations beyond June.

"This is a certainly a risk, but we're not getting overly spooked by softening data yet.

"We expect data this week to continue portraying mixed economic signals."

It also looks at how, despite the Australian economy bounding ahead, the Reserve Bank of Australia has been reluctant to tighten aggressively, with three 25 basis point hikes and a pause.

By contrast the New Zealand market is pricing in hikes of at least 25bps per meeting from June and over 130bps of hikes in total this year despite the patchy recovery.

"We find these inconsistencies hard to swallow and they imply that our short end can move lower as hikes are priced out.

"Governor Bollard's "meaty chunks" certainly look to be off the table."

Last week J.P.Morgan Weekly Prospects had the last economist left pricing an April OCR hike and this week it has frog leapt to pricing a July and September hike of 50bps.

The change of heart has come because when asked about GDP expectations earlier this month, the Governor said that reasonable growth should be achieved in coming quarters and these numbers will signal whether or not the "economy is getting out of a fragile growth phase into a more assured one".

The first quarter GDP print, however is not due for release until June 26, so J.P.Morgan believes it looks like, on the basis of Bollard's comments, the first rate hike will be delayed until after then.

"Waiting for hard evidence of sustainable growth however, looks likely to be a mistake," says J.P.Morgan.

"It probably means the Reserve Bank will be forced to play catch up in the second half of 2010 and also risks the inflation problem becoming worse."

BNZ Markets Outlook says if the Reserve Bank moves around the middle of the year, it might not get too far before its impacts are felt pretty hard in the economy as there are a great many households and businesses relying on relatively lower short term rates at the present.

"So we might end up with a bit of tweaking in the OCR - under the cover of Budget-fuelled demand - rather than an ongoing tightening cycle as such."

ASB Business Weekly says it also now expects the Reserve Bank to lift rates in June and it expects this tightening to occur at a lower pace, with OCR increases of 25bp instead of 50bp at the initial meetings.

Mortgage rate advice from Westpac Weekly Commentary suggests that repaying more than the minimum amount and spreading the loan over a mix of terms can help to reduce overall risk regarding uncertain future interest rate changes.

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