26 Apr 2016

Where are interest rates headed?

11:12 am on 26 April 2016

The Reserve Bank is due to review the official cash rate on Thursday. Are we in for another cut or will it be a case of steady as she goes?


Photo: 123RF

The tide of opinion is strongly of the view the Reserve Bank will keep the cash rate steady at 2.25 percent.

Only a handful of analysts are picking another cut to follow last month's surprise quarter percentage point reduction, and financial markets are pricing around a 30 percent chance of a cut.

The arguments for a cut and conversely for a rise are much the same as they were in March.

Kiwibank economist Zoe Wallis correctly called last month's cut and said there was every reason for central bank governor, Graeme Wheeler, to do it again this week.

"We're seeing business confidence start to pull-back and typically implies that growth could also be weaker over the next couple of quarters," she said.

Chief economist for Deutsche Bank Darren Gibbs thinks the next cut will be mid-year, and regardless of the timing he said that would only add further fuel to the hot housing market.

Reserve Bank Governor Graeme Wheeler.

Reserve Bank governor Graeme Wheeler Photo: RNZ

He wondered whether the economy needed another rate cut at all.

"I'd prefer to see the OCR remain at really where it was back in March, I think the economy is already back at full employment, I think inflation - whilst it is low - is probably at a turning point...I'm not particularly stressed if it doesn't pick up quickly," he said.

Last month Mr Wheeler signalled that more reductions could be in the offing.

"Further policy easing may be required to ensure that future average inflation settles near the middle of the target range," he said after announcing the OCR cut in March.

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