5 Dec 2011

Reserve Bank expected to keep OCR on hold

6:51 am on 5 December 2011

The Reserve Bank is expected to downgrade its world growth forecasts and keep the Official Cash Rate on hold at 2.5% until the second half of next year when it releases its monetary policy statement on Thursday.

The intensifying financial risks in Europe and the threat to New Zealand are seen as the main factors in the Reserve Bank's change of stance.

Westpac chief economist Dominick Stephens says gradual rate increases are still on the cards, but not before Europe's debt crisis is resolved.

He says domestic developments will have little influence on this week's review of the OCR.

Mr Stephens says the export sector has been doing very well over the last year or two, but the domestic economy has been slow.

He says from here it's expected there will be a significant ramp up in the construction industry, which will put pressure on resources and put pressure on inflation and eventually result in OCR rises.

"However, for the time being, inflation is actually fairly subdued, apart from the fact that the GST hike is still in the inflation number", says Mr Stephen.

He says by early 2012 it's expected the annual inflation will be around 1.5%, which would give the Reserve Bank breathing space till the later part of 2012 before increasing the OCR.

NZ impact

Mr Stephens says there are two ways that New Zealand could be hit by the situation in Europe.

He says one is that the Asian economy also slows, thus reducing the global price of food and reducing the returns for New Zealand exporters and that's expected in small measure.

Mr Stephens says there's also a risk that the cost of bringing capital in from overseas goes up - which could result in higher retail interest rates in New Zealand next year.

He says this could mean, for example, that floating mortgage rates could increase to 9 to 9.5%, but not until 2015 or so.