OCR increase expectations pushed out to September

Bank economists are shifting their views further out on the Official Cash Rate (OCR) increase with ASB now joining Westpac in predicting a September hike.

Wednesday, January 19th 2011, 11:51AM

by Jenha White

Prior to Christmas, both Westpac and ASB were picking a June OCR increase of 25 basis points to 3.25% alongside other banks.

ASB economist Nick Tuffley says in ASB Business Weekly that its change of view comes as ASB believes convincing signs of recovery in the economy won't be seen in three important areas till September - in a strengthening housing market, further recovery in business sentiment and a sustained recovery in business credit.

Supporting ASB's view is the December Monetary Policy Statement where the Reserve Bank said  it wants to be more confident of a recovery before lifting rates again, particularly given the fears of prematurely lifting rates and choking off the fragile recovery.

Tuffley says with recent activity data generally disappointing and inflation indicators suggesting inflation pressures are subdued for now, there looks to be little urgency for the Reserve Bank to lift the OCR.

Statistics New Zealand figures released before Christmas showed a 0.2% fall in gross domestic product during the September quarter which was a weaker result than the Reserve Bank's 0.3% expectation.

The fall essentially means there is more capacity in the economy to handle growth over 2011 than previously thought therefore reducing the chances that monetary policy will tighten again in June.

Tuffley says as a result, ASB expects the initial phases of tightening will be gradual, with the first few tightenings occurring at the September, December 2011 and March 2012 Monetary Policy Statement releases.

"Beyond that, we expect the tightening cycle to pick up the pace as inflation concerns elevate."

BNZ Weekly Overview economist Tony Alexander however, is still expecting the OCR to be raised in June with the rate peaking at about 5% come the first half of 2012.

 "If I were a borrower I'd be lying back thinking how great it would have been to have been paying current interest rates years ago when I had a mortgage - at 18.5% back in 1987. Borrowers have been able to enjoy the lowest mortgage interest rates since the 1960s."

He says he doesn't think inflationary risks are great enough that fixed rates or floating rates will be shooting up in the near future.

"So I would be borrowing at a floating rate of 6.09% and paying off principal as rapidly as possible."

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