Just about nobody expects Reserve Bank governor Alan Bollard will change interest rates on Thursday, the debate being over whether he will maintain a mild bias towards higher rates or switch to a more neutral stance.
Reuters' latest poll shows all 14 economists expect Bollard will leave his official cash rate (OCR) at 7.25% when he releases his next monetary policy statement this week. Most economists expect Bollard will continue to rule out any OCR easing any time soon.
But, as has been the case for some time, financial markets are anticipating an easing isn't too far off. On Friday, the 90-day bank bills, from which lenders price their floating mortgage rates, were trading at about 7.5%, about where the central bank's last forecasts published in December 2005 had them trading by the end of this year.
However, the December 2006 90-day 90-day bank bill futures contract is implying they will be trading at 6.79% by year's end. In effect, the market is anticipating two cuts to the OCR this year.
Anthony Byett, chief economist at ASB Bank, expects Bollard will reiterate his warning that there will be no quick rate cuts. 'It will probably require a strong warning, though, to prevent even greater expectations of rate cuts, let alone reverse this expectation.'
Byett notes the latest statistics are showing signs of peaking in two of the four things Bollard has been fretting about, employment and house prices (the other two factors are wages and government spending).
'There is sufficient evidence that demand growth is slowing to enable the Reserve Bank to put policy on hold and downplay the risk of even tighter monetary conditions,' Byett says.
Brendan O'Donovan, chief economist at Westpac, says that the economy grew only 0.2% in the September quarter compared with the Reserve Bank's 0.8% forecast and that Bloomberg shows market concensus is that it grew 0.2% in the December quarter compared with the central bank's 0.7% forecast.
O'Donovan is strongly of the view that Bollard should switch his stance to neutral, rating the risk of a monetary policy-induced slump as greater than the inflation risks.
'However ... it is likely that another round of weak data is needed to sway the Reserve Bank that the balance of risk has shifted dramatically under its feet,' he says.
Robin Clements, an economist at UBS New Zealand, also thinks Bollard should switch to a more neutral stance, noting that the central bank's own survey has shown the first fall in inflation expectations in nearly three years.
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