8 Mar 2010

Economists pick no rate change - for moment

7:36 am on 8 March 2010

Economists are expecting the Reserve Bank to repeat that benchmark interest rates will not start rising until about mid-year, when it reviews the cost of borrowing on Thursday.

The Official Cash Rate stands at 2.5%, where it has been since April.

The Reserve Bank has proceeded cautiously amid signs of a subdued recovery, as it assesses the durability of any pick-up.

Retail spending has improved, but households appear to be repaying debt, while business spending remains weak.

ASB chief economist Nick Tuffley says one of the biggest changes in recent months has been the housing market running out of steam.

He says the housing market looks to be slowing quite rapidly of its own accord.

Deutsche Bank chief economist Darren Gibbs says domestic activity has eased at the same time as global growth forecasts have risen, despite China taking steps to cool its economy, and concerns about Greece's debt problems.

He says Asia and Australia are doing better than expected, with slight upgrades in growth forecasts there.

Mr Gibbs says there is a slightly lower exchange rate and slightly higher commodity prices, so that part of the picture is more positive.

He says the economy has broadly moved in line with the Reserve Bank forecasts, and that indicates rate rises will not start until June at the earliest.

The Institute of Economic Research's principal economist, Shamubeel Eaqub, says that even if the economic recovery is still in doubt by then, there will still be a case to raise rates.

He says the current interest rates are out of step with retail interest rates.

Mr Eaqub says it is important for the Reserve Bank to get interest rates back to more normal levels so the bank can react if the economy starts to slow again.

Economists say benchmark interest rates are likely to peak about 5% over the next 18 months because higher retail bank funding costs will push up mortgage rates and keep a lid on demand.