Bollard will review his official cash rate (OCR), currently at 7.25%, on Thursday.
The annual inflation rate for 2006 came in at 2.6%, the first time in six quarters that it has been within Bollard’s zero to 3% target, while the economy grew just 0.3% in the September quarter compared with market expectations of 0.5% and the Reserve Bank’s expectation of 0.7%.
Bank of New Zealand and Deutsche Bank economists think Bollard should ignore these seemingly benign headline figures and raise rates now to prevent inflation getting out of hand in the medium term.
The biggest factor cutting the inflation rate was a 15.2% fall in petrol prices in the December quarter.
“Over the last few years, the Reserve Bank has consistently clutched at any piece of data that might give it the right not to raise interest rates,” BNZ's Stephen Toplis says.
“In our opinion, the storm is brewing which portends inflation back above the Rserve Bank’s target bank in 2008 unless the bank acts now to soften domestic demand,” he says.
Deutsche Bank's Darren Gibbs says other more forward looking figures, such as those showing house price inflation running at nearly 12% and strong household spending, “suggest that the medium-term growth and inflation outlook is at least as strong as believed previously.”
ASB Bank economist Daniel Wills believes the central bank will hold rates steady but maintain its hawkish stance, reserving the right to raise rates further down the track.
Still, he notes that the wholesale interest rates market is pricing in about a 50% chance of a rate hike this week.
