Reserve Bank expected to hold OCR steady

Economists expect Reserve Bank governor Alan Bollard will hold rates steady this week despite evidence the economy remains surprisingly strong.

Bollard’s official cash rate (OCR), which has a direct bearing on floating mortgage rates and a lesser impact on fixed-rate home loans, currently stands at 7.25%.

Craig Ebert, an economist at Bank of New Zealand, says the central bank is under a bit of pressure. “Even though most of the data has been pressing on the strong side, it hasn’t been substantive,” he says.

While he doesn’t expect Bollard to move rates, he expects the wording of the press release accompanying the monetary policy statement will be hawkish. “There should be a clear message that the data’s going to remain very important” and that, if it continues to be strong, another rate hike is on the cards.

Cameron Bagrie, chief economist at ANZ/National Bank, says the big decline in petrol prices recently means the annual inflation rate, 3.5% at the end of September, is likely to head back below 3%. Bollard is pledged to keep inflation between zero and 3% over the medium term.

“The Reserve Bank is going to take a little bit of comfort from that but I don’t think that’s the end of the inflation story. But it’s hard to raise rates when inflation’s coming down,” Bagrie says.

Another reason for not raising rates is that the currency is currently very strong at nearly 69 US cents compared to around 60 cents back in July, although it is stable against other major currencies.

“If they hike at this point, that will push it through 70 (US cents),” he says.

Nick Tuffley, an economist at Westpac, says the Reserve Bank’s spotlight is again likely to focus on the strength of the housing market and signs it could be strengthening further.

Tuffley doesn’t think it will. “The housing market and household finances are stretched and logic dictates there is only so long that either can remain aloft.”