sign up log in
Want to go ad-free? Find out how, here.

Economists split on timing of first OCR hike - end of 2011 or first quarter of 2012? Depends on quake rebuild, underlying inflation pressure

Economists split on timing of first OCR hike - end of 2011 or first quarter of 2012? Depends on quake rebuild, underlying inflation pressure

Economists at New Zealand's major banks are split on when the Reserve Bank might begin to increase the Official Cash Rate from its emergency setting of 2.5%, pointing to either late 2011 or the first quarter of 2012.

The Reserve Bank indicated in its March Monetary Policy Statement it would begin to raise the OCR when inflationary pressures began to flow through the economy from the rebuilding of Christchurch, which was been interpreted as the begining of 2012.

All economists are however confident the central bank will keep the rate on hold at 2.5% at its next review this Thursday, to be announced at 9am. The Reserve Bank's accompanying statement on Thursday will be closely scrutinised for clues on when it sees inflationary pressures starting to show through, with some economist saying these will be too great to ignore before the year is out.

Figures released by Statistics New Zealand last week showed annual inflation in the year to the March quarter was 4.5% - half of which was put down to the increase in GST on October 1 from 12.5% to 15%. The RBNZ has said it would look through the impact of the GST increase in terms of monetary policy - it is tasked with keeping medium-term inflation in a band of 1-3%.

What they are saying:

BNZ economists said the pressure to hike the OCR would be too much for the Reserve Bank to ignore by late 2011:

So along with the earthquake’s impacts expect greater acknowledgement of the generational terms of trade boom New Zealand is experiencing, and even a word on inflation this time. To be sure, the Q1 CPI was neither here nor there for policy deliberations, but it’s the outlook we remain worried about.

However, that’s not to say the RBNZ can this Thursday sound sure on the economy and its likely path. It’s far too early for that. And so on the cash rate we suspect the Alan Bollard will stick to the March MPS script and signal little chance of reversing his insurance (cut) approach to monetary policy before the summer.

As it happens, this is also what the markets are expecting (following their recent up-and-down run in yield), with a 25bp hike not fully priced until January 2012, and a 3.00% cash rate not until around this time next year. We continue to think the pressure to hike, from the reinstituted low of 2.50%, will become too much for even the RBNZ to ignore by late this year, call it December, although our stronger conviction is that the cash rate will end up materially higher than the market reckons for end-2012.

Westpac is picking the RBNZ will be able to hold off until the first quarter of 2012:

We expect this week’s RBNZ statement to be firmly on hold, while acknowledging that the post-quake data has held up better than might have been feared. We think the key phrase from March will be retained: “We expect that the current monetary policy accommodation will need to be removed once the rebuilding phase materialises. This will take some time.”

The other key ‘bias’ statement – “Future monetary policy adjustments will be guided by emerging economic data” – is likely to be removed. At the time this was intended to leave the door open for further cuts if necessary; now, the emerging data is turning market opinion towards the possibility of early rate hikes, which is probably not the impression the RBNZ will want to leave.

Interest rate markets are currently pricing a 60% chance of an OCR hike by December – a figure that was pegged back a little after the softer-than-expected March quarter inflation figures. We expect those odds to be downgraded further after this week’s review.

ASB is also currently picking the first hike will be in March next year, although this will be dependant on the start of reconstruction activity in Christchurch:

We expect the RBNZ to leave the OCR at 2.50% at the April OCR Review, and to continue to highlight the uncertainty that remains over the outlook for the economy. At the March Monetary Policy Statement, the RBNZ had cut the OCR by 50 basis points as an insurance move to support the economy following the February earthquake. Over the past six weeks the RBNZ has had the opportunity to refine its forecasts. However, a large degree of uncertainty remains – particularly around the likely timing of reconstruction. Nonetheless, it remains clear that the NZ economy remains fragile and in need of continued monetary support.

Survey results since the March MPS have confirmed the effects of the earthquake on consumer and business confidence have been substantial. In addition, GDP and CPI data highlighted the weakness in underlying activity even prior to the earthquake. While agricultural export commodity prices remain high, cautiousness within the agricultural sector has muted the impact on the economy. All this suggests little urgency for the RBNZ to return monetary policy to normal settings. As such, we expect the RBNZ will leave the OCR at emergency low settings until March 2012, although the timing of eventual OCR increases is contingent on a recovery in the underlying economy and the start of reconstruction activity.

Finally, ANZ economists say early 2012 may be too late for the first OCR hike:

The New Zealand economy is not booming, and stimulatory monetary policy is appropriate for now. However, given that activity looks set to pick up steadily from the second half of 2011, maintaining the OCR at current levels is unsustainable.

The Bank indicated in March that they expect to start raising rates in early 2012. We suspect this may prove a bit too late, and that the Bank may be taking the foot off the accelerator by the end of the year. Given the stuttering nature of the recovery and significant downside risks – particularly around the global economic outlook – we are anticipating a fairly modest tightening cycle, despite the magnitude of the job at hand.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

7 Comments

Up
0

 "closely scrutinised for clues"...are the 'economists' that useless they can't open their eyes to the inflation already going on...how bloody thick can they be?

Road freight companies have slapped a fuel charge on everything...plus gst

All food and groceries moved by road now costs more.

All producers of food now have increased costs

Bollard is following instructions from the Beehive to stay cheap until after the election...at that point any increase he makes to the ocr will take at least 24 months before it impacts inflation...ie he is 2 years late to start with....

QED, expect inflation to do a dam sight more damage to an already buggered economy. Expect savings not safe from the debasement scam going on, to be eated away. This is not good monetary policy choice by Bollard....it is good political monetary policy action...it is aimed at securing another three years for the pigs at the trough.

And to date those pigs at the trough have failed to make the decisive moves to end the stupid fiscal splurge on benefits handouts backhanders and other vote buying rorts that were  labour trademarks....the game was all about spin bullshit and hope....game over.

Up
0

I think the secret decision has been made in the Beehive to allow inflation to rise. That is why Bollard was told to cut the ocr and why he will keep it down. The election reward is secondary benefits for national. Debasement of the dollar value to wash away the debts in Kiwi$ is the game in play.

Savers need to realise they are being screwed by this govt direction. The destruction of the Kiwi$ is to be the tool used to survive the residential debt bubble damage. If you have savings...for your own sake stay away from being done over...look to move money out of NZ and into aussie mining stocks on any market dip, but get it into aussie $ on any Kiwi$ strength...you won't get both at the same time....if aussie stuff scares you, look to NZ untility stocks and quality food exporters on a market drop.  

To put this another way...your current nett income will buy you 50% less... in about 15 years.

Up
0

The bank lobbyists.. i mean economists provide clues to the RBNZ as to how their business is going and how active the property market is.. obviously not active enough for their liking right now. Key would probably like NZ'ers to start borrowing furiously again so he doesn't have to.. so Bollard puts his mandate to control inflation to the side for a moment and bends over and takes it from all of them.

Debasement of the NZ dollar had to occur sooner or later. The pesants will get grumpy if they dont think their wages are going up.

Up
0

Its unlikely economists could tell you the time in room full of clocks.

All the economists have forgotten that "eco" are the first three letters of there now defunct BS profession. These stooges are just nomic or is that comic?

Id like to see just one of them explain there way out of a few of these inconveniant truths...

http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf 

Up
0

So nobody is mentioning the elephant in the room of a potential Australian housing crisis and how the Australian banks will fair in the aftermath.

Up
0

absolutely. I'm not yet convinced Aus house prices will crash, but at the very least a significant correction is well underway, could easily match our circa 10% correction here in NZ

You would be an idiot to think that this will not have ramifications for NZ in many ways

  

Up
0