OCR on hold for some time: NZIER

The Reserve Bank will keep interest rates on hold for some time in the face of the lacklustre economic recovery and contained inflationary pressures, according to the New Zealand Institute of Economic Research (NZIER).

Wednesday, July 11th 2012, 8:41AM

by Jenny Ruth

“Firms' profits remain under intense pressure from anaemic sales and razor thin margins. As a result, business investment intentions are soft for this stage of the economic recovery,” says principal NZIER economist Shamubeel Eaqub.

While there is encouraging evidence of a rebound in Canterbury following the earthquakes, the recovery has stagnated in the rest of the country, Eaqub says.

Other economists agree the central bank won't be raising its official cash rate (OCR), which directly influences floating mortgage rates, any time soon.

ASB economist Daniel Smith says he expects the OCR to be left on hold until at least March 2013.
“Inflation indicators suggest that pressures remain very subdued,” Smith says.

UBS economist Robin Clements says he had already revised his near-term forecasts downwards and the NZIER survey “reinforces the downside risks that the outlook already faced.”

“The easing of the inflationary guages in the (survey) does not raise the chances of a Reserve Bank rate cut but rather supports our on-hold for some time view,” Clements says.

However, BNZ economist Craig Ebert says he expects core inflation pressures to build which “will be the stuff to keep the Reserve Bank on its toes. Barring a nasty turn in the global economy, the Reserve Bank will be under increasing pressure to wind back its cash rate stimulus.”

“The housing market alone already suggests there is toom much demand in relation to limited supply.”

Ebert says he was surprised NZIER interpreted its survey “as soggy, slack and held up only by Canterbury.”

In his view, outside of Canterbury, “the rest of the economy plodded forth at a decent, if mild, rate. Yet the NZIER used adjectives of 'flat,' 'weak,' 'patchy' and 'slowing.' It must be possible, after all, to wear rose-tinted glasses back to front.”

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