28 Jan 2013

Reserve Bank tipped to leave interest rates on hold

8:42 am on 28 January 2013

The Reserve Bank is expected to leave the cost of borrowing on hold when it decides interest rate levels on Thursday.

Most economists say the Official Cash Rate (OCR) will remain at its record low of 2.5% this year due to a slow global economic recovery, muted inflation, and a weak labour market.

But some pressures are building, most notably the growing momentum in activity in the rebuilding of Christchurch and a surging Auckland property market.

Infometrics senior economist Matt Nolan says the Reserve Bank can afford to sit on its hands until it gets a clearer picture of the economy's recovery.

He says the exchange rate has held up better than expected, while growth in September and inflation in December were weaker, pointing to a weaker monetary policy in the future.

Mr Nolan expects the bank to use new measures to keep a lid on Auckland's housing sector.

He says the housing market has strengthened, the exchange rate and commodity prices are going up and there have been improvements in financial conditions both in New Zealand and in other countries.

Mr Nolan says the fact that these are happening at the same time suggests it is "an international story".

"We're seeing distinct improvements in international conditions which are leading to all these things moving together and the Reserve Bank will want a clear indication about what's going on overseas before they're going to change their view."

Mr Nolan says if the Auckland housing market starts to have a big impact on consumer spending and demand, the Reserve Bank will look to intervene in some way, but would probably do so through loan-to-value ratios if it becomes a major issue.