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Reserve Bank of NZ to pause on interest rates


The run of recent rate cuts may be over.

On Thursday the Reserve Bank will review the official cash rate (OCR) for the first time since Governor Graeme Wheeler cut the benchmark rate to a record low 2.25 per cent. It was the fifth interest rate cut in the last seven OCR reviews.

While no consumers borrow at the rate of the OCR, it has a strong influence on mortgage and savings rates across the economy, which are now at the lowest level in decades.

Reserve-bank-pauseThe surprise cut immediately prompted ANZ to forecast that the OCR would fall to 1.75 per cent by the end of the year, with most commentators expecting at least some further easing before Christmas.

But on Friday, ANZ senior economist Philip Borkin said there were emerging signs of inflation coming in areas of the economy which were performing strongly, such as accommodation and construction, which could bring an end to falling interest rates.

Oil prices had risen from the lows of the start of the year, pushing up the price of petrol, a move which tends to push up prices up across the economy.

"It's likely that we've seen the lows in inflation. The inflation environment is benign, but not as benign as a few months ago," Borkin said.

"It's an environment where calling the OCR lower from here doesn't feel that comfortable to be honest. Whether we see any cuts from here is becoming a question.

Borkin said that while ANZ is still officially picking two more OCR cuts this year, economists at the bank were "losing a bit of conviction" on that call.

Although the strength of the kiwi dollar - now above where it was when the Reserve Bank cut in March - would provide a "headache" for the bank, Borkin said signs of resurgence in the housing market in March could add caution, with lower interest rates likely to add fuel to rising property prices.

Of the four major Australian banks, only BNZ is forecasting that the Reserve Bank will cut on Thursday, while both ASB and Westpac say the decision is still live, but likely to see the OCR unchanged until June.

Westpac senior economist Michael Gordon said the central bank's March forecasts implied one more cut this year, and Wheeler was likely to wait until it had updated its forecasts in June before deciding whether it should deliver another cut.

Although the housing market had risen in March, it came after a period of flatness, meaning prices were below the level the Reserve Bank expected they would be at now.

"We're not in a world where they're so shocked by the housing market that they're not going to cut any further."

Westpac's forecast is that the OCR will drop to 2 per cent, however Gordon said there were a wide range of possibilities given uncertain global economic conditions. However the odds were stacked more towards interest rates going significantly lower than they were for no further cuts.

"It's far more likely that [the OCR] will go below 2 per cent than [it] will end above 2 per cent," Gordon said.

Thursday's OCR review will be the first since the Reserve Bank called an immediate end to media lock ups in the wake of MediaWorks admitting Newshub had breached the embargo.