OCR not expected to increase next week

Economists do not expect the Official Cash Rate (OCR) to increase next week, with third quarter inflation being well-behaved in the middle of the Reserve Bank's target range at 1.5% and with retail sales in August and house prices last month printing weak results.

Thursday, October 21st 2010, 12:39PM

by Jenha White

ASB Business Weekly says the Reserve Bank meets next Thursday and it does not expect this week's data, or the NBNZ Business Outlook Survey next week to change its view that the Reserve Bank remaining on hold is appropriate at present.

J P Morgan agrees saying recent data flow has added further to the case for Reserve Bank Governor Bollard to sit on the policy sidelines throughout the remainder of this year.

Westpac Weekly Commentary agrees saying the inflation result will not faze the Reserve Bank, nor will the upcoming spike in inflation due to the GST increase.

"We believe floating rates will remain on hold for several more months. Fixed terms could rise in that time, but only if there is a substantial turnaround in sentiment on the global economy - as a result, there is no urgency to fix right now."

BNZ Weekly Overview economist Tony Alexander suggests borrowers float because although BNZ's projections say fixing right now will give a lower one, two and three-year cost than floating, floating rates don't look likely to rise till March next year.

BNZ Markets Outlook says inflation is bottoming out around the mid-point of the Reserve Bank's 1% to 3% target band.

However it believes the undercurrents of inflation are northward inclined, which combined with a number of increased government charges will send inflation to 4.3% this quarter and 5% by mid next year.

"This means the Reserve Bank will want to be wary of running policy on the slack side in any way, shape or form."

The market is pricing a 50% chance for the first hike to be at the March meeting, followed by a 40% chance of further hikes for each further meeting through 2011.

"While it does seem unlikely that the Reserve Bank will need to hike sooner than that, there does seem to be a significant risk that the hiking cycle next year will need to be more aggressive than currently priced."

ANZ Market Focus looks at the Reserve Bank Annual Report which provided further evidence of the degree to which Reserve Bank thinking had changed.

It says the Governor's statement noted that while the OCR will move back to more neutral levels, the process is likely to be slow and the degree of policy tightening is unlikely to be substantive as in previous recoveries.

It says ongoing caution by households and businesses, low credit growth, high funding costs, a positively shaped yield curve and the assertion that inflation expectations remain contained, were all cited as influential factors.

"The upshot is that the policy interest rate adjustments will be "slow" which is a world away from the "meaty chunks" flagged earlier this year."

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