OCR predictions for the New Year

Tuesday, December 21st 2010, 5:30PM

The official cash rate (OCR) is predicted to increase by 25 basis points in June to 3.25% with only two further increases by the end of 2011 according to a www.mortgagerates.co.nz survey of economists.

Opinion is split on the second increase, with ASB and Westpac expecting the OCR to rise to 3.50% in September, whereas ANZ and BNZ believe the second increase will be more significant with 50 basis points making it 3.75%.

December 2011 projections are more widely divided with ASB and Westpac expecting the OCR to end the year at 3.75%, ANZ expecting 4.00% and BNZ 4.25%.

BNZ economist Tony Alexander says in the Weekly Overview that the economy is growing but not by all that much.

He says the level of disappointment has been so great that after raising the official cash rate by 50 basis points over June and July earlier this year the Reserve Bank called a halt and now suggest they won't be raising it again until the June quarter of next year.

"It is very unusual to have such an interruption in a tightening cycle but these are very unusual times which we are living through and sure as eggs are eggs unusual things will happen again next year."

He says that for the moment floating still looks good and is great for all those people wanting to get their debt levels down as quickly as possible. But at some stage it will pay to flick into a fixed rate.

He says overall BNZ's expectation is that the economy will be seen as finishing this year on a weakish note, starting next year also weak, but accelerating as the year progresses driven by a variety of factors eventually taking growth to 3.6% for the calendar year.

He predicts factors driving growth will be:

• Rebuilding Christchurch following the earthquake.
• Rugby World Cup.
• Record average commodity price feed-through.
• House construction lift late in the year in response to shortage worries growing.
• Business capital spending slowly improving as a productivity focus returns in light of a labour market potentially tightening up rapidly.
• Low NZD/AUD exchange rate.

But says there will be offsets from things like the following.

• 
  
• Tightening fiscal policy
• Drought
• Structural debt tolerance shift of unknown magnitude.
• Tightening monetary policy from mid-year probably.
• Easing net migration inflows.
• Potential shocks from offshore.
• High fuel prices.

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