7 Sep 2009

Reserve Bank expected to hold interest rate steady

4:29 pm on 7 September 2009

Most economists are betting the Reserve Bank will hold its benchmark rate this week, and that its next move will be to raise rates - though not until the middle of next year at the earliest.

The central bank reviews the cost of borrowing on Thursday. It has kept the Official Cash Rate at 2.5% since April, when it dropped the rate from 3%.

Last week, Reserve Bank governor Alan Bollard warned any pick-up in the country's economy will be slow and gradual.

Most economists, including TD Securities senior strategist Annette Beacher, say the Reserve Bank will keep the benchmark interest rate on hold on Thursday.

Ms Beacher expects the bank will take the cautious view that the local economy is likely to have a patchy recovery.

However ASB economists are standing out from their peers and betting the central bank will cut the rate to 2.25%.

Chris Tennant-Brown says monetary conditions are too tight for businesses, and the economy still faces challenges including rising unemployment, longer term mortgage rates, and the high New Zealand dollar.

The New Zealand Manufacturers and Exporters Association wants the Reserve Bank to cut the rate to 2% to help ease pressure on businesses facing lower returns from the high dollar.

Meanwhile, the Reserve Bank has indicated it will not raise the key interest rate until later next year, but Deutsche Bank chief economist Darren Gibbs is predicting the bank will tighten the rate by 0.5% in June 2010.

Mr Gibbs expects that, by the end of 2010, the central bank will have raised the benchmark interest rate by 2%.

Economists in Australia expect interest rates to start rising before Christmas, and the government there is now actively considering reducing government support.

Difficult to pick economic 'turning point'

Dr Steven Dunaway, a research fellow with New York-based Council on Foreign Relations, says there's been a lot of discussion internationally about withdrawing government stimulus measures, but it's premature to say the global recession is over.

Dr Dunaway says it is difficult to pick the 'turning point' as much of what appears to be improvement is partly due to forecasts last year being too low.

"The other thing is just a statistical phenomenon, that when you stop dropping very rapidly, you get a kind of bounce," he says.

Dr Dunaway, who visited New Zealand last week as a guest of the Institute of Economic Research, says western nations still need to learn to live within their means and Asian nations need to spend more.

Government spending will be an important bridge while that change takes place, he says.