Earthquake eliminates chance of September OCR hike

The 7.1 magnitude earthquake that hit Canterbury and the collapse of South Canterbury Finance last week eliminates any remaining chance of a September Official Cash Rate (OCR) hike according to economists.

Tuesday, September 7th 2010, 2:31PM

by Jenha White

ANZ Market Focus emphasises that a pause in increasing the OCR will only be a temporary respite and the Reserve Bank is expected to resume removing policy stimulus either late this year or early next year.

It says long-term interest rates are a completely different story, with rates moving higher as  market enthusiasm for further quantitive easing (QE) in the US has waned somewhat.

"But while the hurdle for QE is clearly high, we doubt the debate is over just yet and view the stiff rise in long end rates as a typical market correction."

Looking at the impact of the earthquake, ANZ says it is hard to imagine confidence not being impacted which is a concern as it has already been slipping for five months.

It also says while there will be increased construction activity in 2011 and 2012 as rebuilding commences and it suspects the displacement effects from other areas such as tourism will mitigate the aggregate economic flow-on.

"We see limited financial market consequences of financing the rebuilding effort."

Westpac says an economic factor of the earthquake is that markets will probably factor in a lesser chance of hikes this year and the short end of the yield curve can be expected to fall.

"Our analysis suggests that long-term rates should rise on the fiscal cost of reconstruction so the yield curve should steepen."

ASB Business Weekly says overseas experiences with earthquakes suggest GDP growth could be weak in Q3, instead of robust in the lead-up to GST, however reconstruction activity will subsequently boost GDP potentially by 1.5%.

"Some of this activity will cause pockets of inflation but we expect the Reserve Bank will look through these impacts, we now expect the Reserve Bank will refrain from hiking until early 2011."

BNZ Markets Outlook says the earthquake will be a big market mover and it seems likely the market will completely price out hikes in September and October.

It says further out  the curve is somewhat more interesting, however,  as the market will digest the effect of a short term hit to GDP but the likely inflationary impact of increased construction in the Christchurch area going forward.

BNZ says it is likely the curve will steepen further with lower rates in the shorter dates but higher yields further out the curve.

JP Morgan Weekly Prospects says the earthquake provides further reason for the Reserve Bank to hold fire in the near-term.

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