September OCR increase more likely

In a nutshell inflation is driven by growth versus economic slack and analysing these areas brings to light a reduced chance that the official cash rate (OCR) will increase in June making September more likely.

Tuesday, February 1st 2011, 6:06AM

BNZ economist Tony Alexander says in the BNZ Weekly Overview that the economy's capacity picture looks good, reducing inflationary risk.

"The more spare resources, the more growth we can handle (if it comes) before inflation needs to be worried about."

As for growth, Alexander believes indicators over the past few weeks suggest it is slower.

The Prime Minister's announcement last week that fiscal policy will be tightened more rapidly with a year to be shaved off the period before surpluses return also implies a tad more restraint on growth.

Alexander says this again increases the chances that the Reserve Bank will delay monetary policy tightening.

However he believes it is not yet a slam dunk case that the next OCR rise will be in September rather than June.

Westpac Weekly Commentary however says it is likely the Reserve Bank will need to see more than a one-quarter growth spurt to be persuaded that the recovery is "robust", so it is predicting September.

BNZ Markets Outlook says it feels like this will be the real crunch year, with all of the easy options related to expensive policy support having been largely drawn upon over 2008 - 10.

ANZ Market Focus says early indications on momentum in 2011 look far better than how 2010 closed, "but we are also mindful of false dawns".

It says for now ANZ is taking encouragement on what it is seeing here and now, but it needed to extend for another 10 weeks.

ANZ says in the meantime, a bout of lagging data will be coming in which; (a) will reinforce the view that any bounce is coming off lows, and (b) keep commentators somewhat wary.

"The latter is frustrating because we prefer to talk about the future, as opposed to looking in the rear-view mirror."

ANZ also believes two points stood out in Reserve Bank Governor Allan Bollard's speech last week - the degree of uncertainty that lies ahead and the diverse nature of that uncertainty.

"Indeed it's not as if the major building blocks of the recovery are in place, with only a few minor risks on the periphery.

"Instead, every part of the economy is going through a transition and there are significant risks in each area.

"Lining the ducks up could be tricky and it's going to be awhile before a clear view will emerge of where the economy is headed."

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