14 May 2012

Economists quash markets' prediction of rate cut

7:52 am on 14 May 2012

Economists are picking the Reserve Bank will keep interest rates on hold at 2.5% in June despite markets expecting a cut to help bring the dollar down further.

The New Zealand dollar has fallen 5% against the US currency in the past two weeks to US78.2 cents.

At its last review, the Reserve Bank signalled its frustration with a persistently high New Zealand dollar despite declining commodity prices and indicated interest rates could fall further.

Since then the Kiwi has fallen, prompted by questions over Europe's commitment to cut debt and sluggish wage growth and tepid housing and retail sectors in New Zealand, raising concern the pace of economic growth is slowing.

The markets are pricing in a 74% chance the Reserve Bank will cut in June. Shamubeel Eaqub, the principal analyst at the Institute of Economic Research, says the dollar is still at high levels despite recent declines.

Mr Eaqub says he does not expect the central bank to reduce rates and will leave the cost of borrowing on hold until 2014.

BNZ economist Doug Steel says any attempt by the Reserve Bank to cut rates could backfire.

He says there is some inflationary pressure beneath the surface - particularly in the labour market - and it is not as weak as a lift in the unemployment rate suggested. The property market is also picking up slightly.

Mr Steel expects the Reserve Bank will keep rates on hold this year, before rising inflation pressures prompt rises in 2013.

While exporters would like the exchange rate to fall much further, Shamubeel Eaqub says there are also benefits from a high currency, such as cheaper imports.

The Reserve Bank will next review the Official cash rate on 14 June.