OCR announcement expected to have a downbeat tone

Economists are expecting a more downbeat tone to the Reserve Bank's Monetary Policy Statement this Thursday, but no surprises as it tries to retain flexibility in when it will start policy tightening.  

Tuesday, March 9th 2010, 9:32AM

by Jenha White

ANZ Market Focus says it expects the Official Cash Rate (OCR) to be left unchanged at 2.5% and the timing of the tightening cycle vague to give the Reserve Bank flexibility.

"Specifically we struggle to see why the Reserve Bank would continue to include references to "the middle of 2010" in regards to tightening policy, given that we are now already in March."

It puts the patchiness in economic momentum down to four reasons, a backdrop of household deleveraging and a structural imperative to improve New Zealand's external position, some success the Reserve Bank is having with its liquidity regime, continued global unease and some uncertainty regarding impending tax changes.

"Of course there is a host of other reasons, but we believe these four capture the thrust of the patchiness that is being reflected in hard data such as unemployment and investment."

ANZ is also now inclined to pencil in Q3 as the start of the tightening cycle rather than Q2 as it believes expectations of growth need to be matched by reality before policy support can be removed.

J.P. Morgan Weekly Prospects agrees pricing a July 50 basis point hike as recent weak domestic data on the housing market, employment and retail sales give little urgency to kick off the tightening cycle.

The Deutsche Bank says it expects the "middle of 2010" to again be the description of when stimulus will be removed with June being the earliest option for an OCR hike.

It believes there is an increasing risk a hike will be delayed until July or even September meetings especially if the housing market continues to back peddle over the next couple of months.

Westpac Weekly Commentary however does not believe the Reserve Bank will downgrade its interest rate forecasts because although the unemployment rate was a shock at 7.3% the Reserve Bank should be comfortable with the view that unemployment is at or close to its peak and secondly it may be viewing the world from a  different starting point to the markets.

ASB Business Weekly agrees saying while subdued outturns of recent data releases have reduced the urgency to lift the OCR, recovering demand and diminishing capacity will see inflation pressures build up over the coming year.

ASB is expecting tightening at the June meeting with 25 basis point increases at each meeting until July 2011.

BNZ Markets Outlook says while there are obvious risks of starting to remove stimulus too soon, there are also hidden dangers in diluting the message that short-term interest rates will need to rise before too much longer.

"Softening this warning might slacken the intent of businesses and consumers to sort out their debt loadings, just when such a desirable de-leveraging process would appear to be underway."

BNZ says all things considered it still prefers June as the start-point to OCR hikes.

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