22 Apr 2013

Reserve Bank tipped to keep interest rates on hold

7:37 am on 22 April 2013

Economists are almost certain that the Reserve Bank will keep interest rates on hold at 2.5%, when the bank announces its next interest rate decision on Thursday.

A poll by Reuters of 17 economists shows most of them are sure the official cash rate will be kept at its record low.

Westpac chief economist Dominic Stephens said the central bank was likely to sit on the fence for some time, but he would be paying close attention to comments that may hint at the bank's future direction.

He said there were two major risks: first that the very high exchange rate could depress inflation further meaning that the best course of action would be to keep the OCR low or move it even lower.

But Mr Stephens said the other risk was that the housing market could become too buoyant and the rebuilding of Christchurch could generate too much inflation pressure in which case the Reserve Bank should move towards increasing the OCR.

He said there was no particular pressure on the Reserve Bank to decide which of those risks was the more important and it could just sit on the fence for a time yet.

Some economists predict a rise in the OCR as soon as September, while others favour March next year.

Westpac's Dominic Stephens said he was picking later, rather than sooner, because inflation was low, giving the Reserve Bank more time to wait.

Deutsche Bank chief economist Darren Gibbs agreed, but said there was potential for the next rise to be pushed out even further if the central bank used new macro-prudential tools to slow down the housing market.

He said the bank's next Financial Stability Report on 8 May may provide some guidance on how, and when, these tools might be used.

Mr Gibbs said if the bank were to use the macro-prudential tools that would probably mean less upward pressure on the OCR later in the year.