Economic experts are urging the Reserve Bank not to change the Official Cash Rate.
The New Zealand Institute of Economic Research’s Monetary Policy Shadow Board recommends the central bank leaves the OCR at 3.5% on Thursday.
A majority of the board, whose nine participants give their personal opinions on where interest rates should be, is comfortable keeping the OCR on hold.
The board’s average recommended OCR is 3.46%.
NZIER concludes now isn’t the time to unwind last year’s interest rate hikes.
Its principal economist, Kirdan Lees, says the factors that favour lower interest rates are more compelling than the domestic indicators that point towards a strong economy.
NZIER’s Quarterly Survey of Business Opinion indicated strong economic growth of 3% to 3.5%, continuing from the end of 2014 to the start of 2015.
Auckland city’s median house prices also shot up 13.2% last year, boosted by strong migration.
Yet on the flip side, slumping oil prices saw annual inflation drop to 0.8% between September and December, which is below the Reserve Bank's 1% to 3% target band.
Lees says dairy price falls and drought conditions will also dampen economic activity in 2015.
Furthermore, inflation pressures are muted throughout the economy, as businesses are finding it hard to pass on price increase to consumers.
Shadow board participants’ views
“There are a lot of balls in the air at the moment”, says BNZ’s head of research, Stephen Toplis.
“The major risks to inflation still lie to the upside, as activity runs above potential and the housing market reheats. But at the same time, downside risks from global issues, weak dairy prices and a prospective drought are very real.”
New Zealand Steel and Tube CEO, Dave Taylor, and ANZ chief economist, Cameron Bagrie, lean towards dropping rates to 3.25%.
“Always thought the RBNZ pushed too hard too fast. With the current conditions there is a case to redress”, says Taylor.
Bagrie maintains, “The RBNZ has an inflation target and not a growth or a housing one. Non-tradable inflationary pressures are receding rather than accelerating. There looks to be material structural forces at work.
“The OCR is higher than it needs to be. They won't be cutting but the tightening bias needs to disappear.”
Business New Zealand chief executive, Phil O’Reilly, and MYOB executive director, Scott Gardiner, are completely behind leaving rates at 3.5%.
Gardiner says, “Concerns loom on the horizon for SMEs with many sectors at top of business cycle – and head winds about to arrive with prices flowing through to cash flow challenge for key sectors.”
Auckland University professor and Motu senior fellow Arthur Grimes doesn’t want rates to creep above 3.5%.
“Goods markets are showing approximately zero inflation while some asset markets are still showing some upward pressure.
“This complicates monetary policy rate-setting but, on balance, a wait-and-see approach to the interest rate level is warranted with no precipitate changes required in either direction.”
Toplis and Auckland University professor, Prasanna Gai, are the only participants who wouldn’t mind the OCR edging up slightly to 3.75%.