Euro zone volatility may push out OCR hike

The volatility of Euro zone has further highlighted the fragile nature of the economic recovery and if market turmoil continues, an Official Cash Rate (OCR) hike may be pushed out for longer according to economists.

Monday, May 24th 2010, 6:02PM

by Jenha White

ASB Business Weekly says global markets have been dominated by continued fears that the Greek government will default on its debt and that problems will spread to other European economies.

It says there is also early evidence of liquidity coming under pressure and if such problems spread to New Zealand the Reserve Bank may hold off raising the OCR in June. Reflecting these concerns the market currently only has 40% of a rate hike priced in.

BNZ Markets Outlook says there is concern about the impact of what is going on in Europe and the flow on effect into interest rates.

"Heightened concern about the stability of the global banking systems is again pushing up the cost of short-term funding to the New Zealand banking system and these increased costs will find their way through to borrowers as well."

ANZ Market Focus says perhaps most importantly, even if this recent bout of turmoil turns out to be a spook, it's a reminder of how fragile things are.

"As Dr Bollard recently noted, ‘the recovery so far has been full of surprises and there will be more to come,' this in itself suggests a lower endgame for the OCR," says ANZ.

Regardless of Eurozone's demise, ASB, BNZ, ANZ and Westpac are all still expecting a June OCR rise, unless there is a substantial deterioration in liquidity triggered by the European Sovereign debt crisis.

J P Morgan Weekly Prospects is maintaining its call for the first rate hike to be in July because of growing uncertainties in the Euro area and weakness in some of the domestic indicators.

Westpac Weekly Commentary  says the decision to fix or float is finely balanced - floating rates are lower than

short-term fixed rates at the moment, but they are likely to rise faster as the Reserve Bank increases the OCR.

It says fixing, if even for a short term, has the advantage of greater certainty around cash flows, at a time when floating rates could be rising rapidly.

"Repaying more than the minimum amount, and spreading the loan over a mix of terms, can also help to reduce the overall risk around uncertain future interest rate changes."

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