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NZ OCR tipped to hold but appetite for rise growing

Property Here - Wednesday, July 24, 2013

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The NZIER shadow board believes the Reserve Bank should leave the official cash rate on hold at 2.5 per cent when it reviews it tomorrow, but less emphatically than it did six weeks ago and with an increasing preference for a rise as the next best option.

The shadow board is a panel of nine economists and businesspeople the New Zealand Institute of Economic Research asks to quantify their preference for various levels the bank could set its policy interest rate at. The results are then aggregated to give an indicator of which rate the bank should go for and the shifting balance of risks around it.

It now has a 61 per cent preference for keeping the OCR on hold, as the markets are confident the bank will, but that is down from 69 per cent ahead of the June review.

And it has a 26 per cent preference for a rate increase, up from 19 per cent last month and 12 per cent in April.

Inflation has been below the bottom of the bank's 1 to 3 per cent target band for a year.

"But the economy is lifting and confidence measures have picked up. Auckland and Canterbury look particularly strong, even though weak fiscal spending is dampening economic growth across the nation," NZIER economist Kirdan Lees, who set up the shadow board, said.

"The Auckland housing market is frothy, continuing to bubble away at elevated levels supported by growth in household credit. That behaviour heightens the risk of a big correction in house prices in the future. Globally, the US [dollar] continues to lift but the Australian outlook is moderating, reflected in a stronger kiwi-aussie exchange rate. So on balance, the shadow board thinks leaving rates right where they are is the best move."

Two members of the panel, Westpac chief economist Dominick Stephens and ANZ chief economist Cameron Bagrie, have pointed to the fact that fixed-term mortgage rates have risen between 15 and 25 basis points in recent weeks as reducing the need for the central bank to raise the OCR.

"Rising fixed mortgage interest rates are doing the Reserve Bank a favour," Bagrie said. "Either borrowers take a hit and fix at higher rates or they stay short, maintaining the high degree of policy traction available to the Reserve Bank [when it does eventually tighten]."

Stephens said two factors had driven up wholesale interest rates: a drop in the New Zealand dollar against the US dollar and a string of data showing the economy firmly in the grip of an upturn.

But he expects the Reserve Bank will still say the dollar is overvalued and said the pick-up in growth associated with the Canterbury rebuild had long been anticipated and the fact that it had now arrived would not be cause for the bank to alter its outlook for monetary policy.