Market looks to Bollard for guidance on interest rates

Softer than expected inflation, retail sales and employment data and signs the housing market recovery has stalled will likely mean Reserve Bank governor Alan Bollard leaves interest rates unchanged on Thursday and he will reiterate the first rate hike is likely about mid-year.

Sunday, March 7th 2010, 9:59PM

by Jenny Ruth

Bollard's official cash rate (OCR) has stood at 2.5% since April last year.

The weaker data has reduced the urgency to lift the OCR from its current emergency level, says Nick Tuffley, chief economist at ASB Bank.

"The upside risks to the outlook have softened since December," Tuffley says. "The housing market is rapidly losing momentum, aided by the increasing likelihood tax advantages for property investment will be reduced."

As well, there are increasing concerns about the sustainability of the global recovery.

Tuffley is forecasting Bollard will hike the OCR on June 10 and continue raising it by 25 basis points at every review through to July 2011.

Westpac chief economist Brendan O'Donovan says the weaker data is unlikely to sway Bollard as much as it has swayed the market.

"This may come as a surprise to the market which has taken some of the softer data in recent weeks ... as a reason to push out the expected timing of the first rate hike and seems to be expecting the Reserve Bank to do the same," O'Donovan says.

"But compared to the last set of (Reserve Bank) forecasts published in December, the evidence has, if anything, been in favour of higher interest rates."

Darren Gibbs at Deutsche Bank says the weaker data and the housing market weakness are welcome developments.

"However, as in January, we expect the bank will conclude that, contingent on the economy evolving as expected, it will likely begin removing stimulus around the middle of 2010."

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