BNZ pushes back OCR increase prediction

BNZ has pushed back its view on when the official cash rate (OCR) will increase from June to September, joining the predictions of ASB and Westpac.

Friday, February 4th 2011, 10:38AM

BNZ economist Tony Alexander says in the Weekly Overview that lending for housing has fallen for the fist time on record and the unemployment rate rose to 6.8% in the December quarter, not holding at 6.4% as forecast by the Reserve Bank in early December.

"What we have is a combination of easing demand and rising slack in the economy - these developments argue strongly against an interest rate rise in the next few months.

"We now do not expect the next rate rise to come until September," says Alexander.

Further supporting the argument for the next monetary policy tightening being a long way away is the increasing power of monetary policy changes coming about as people roll off fixed rates into floating rates, he says.

The latest data show that at the end of December 46.2% of mortgage volume was floating which is the highest proportion since sometime before mid-1998 when the records start.

"A change in the official cash rate now will affect many people straight away meaning that the Reserve Bank can take its time assessing the inflation risks whereas in the past they had to move quickly knowing it would take a long time for the bulk of borrowers to feel any cash flow change."

He says the economic data we have received since the start of the year show convincingly that the rate of growth in the New Zealand economy is not picking up.

"There are certainly many factors which argue for much stronger growth this year than last but they have yet to kick in and the longer it takes for that to happen the more spare capacity builds up."

He says that means reduced inflationary pressure, which means the Reserve Bank can wait longer before they feel the inflation threat is great enough to warrant raising interest rates.

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