Quake to have impact on monetary policy, economists say

The collapse of South Canterbury Finance and the earthquake in Christchurch will have fall out for monetary policy, with economists predicting the Reserve Bank of New Zealand (RBNZ) will leave the official cash rate (OCR) unchanged next Thursday.

The central bank has raised the rate, which is currently 3 percent, twice but a breather in the tightening cycle is now likely. It releases its Monetary Policy Statement (MPS) at 9am on Thursday.

"The collapse of South Canterbury Finance and the Canterbury earthquakes both make a case for the RBNZ to sit out next week's review, at a time when economic confidence may be fragile," Westpac economists said in a preview.

"Beyond this, both events are best dealt with through the targeted measures that are already being put in place, not with a blunt tool like interest rates," the economists said.

The RBNZ is not likely to have incorporated any earthquake effects in the economic projections in the MPS, which are usually finalised two weeks before release. But it will certainly be discussed in the policy assessment.

The economic data in recent weeks has also given mixed messages about the pace of the domestic recovery, and the global picture has become, in the words of the Federal Reserve chairman, "unusually uncertain".

"The failure of South Canterbury Finance and the severe earthquake in the Canterbury region go further towards making a pause a tactful move, but the die was probably cast even before those events," Westpac said.

Still, the RBNZ is expected to eventually return the OCR to more normal levels and there is a debate about what they are.

The June Monetary Policy Statement indicated that the OCR could rise as high as 6 percent by the end of 2012.

"Our assessment is that developments since the June MPS will have knocked about half a percent off the RBNZ's interest rate projections. That's a relatively large change in the space of three months -- but a peak OCR of around 5.25 percent is still a far cry from the 4 percent peak that interest rate markets are currently pricing," Westpac said.

GoldmanSach JBWere economist Philip Borkin also expects no change to the OCR next Thursday.

"We expect the governor to leave his options fairly open," he said.

ASB economists also argue that recent developments mean the RBNZ will err on the side of caution and hold off raising the OCR.

"It is clear from the July OCR review statement that recent economic data have not lived up to the RBNZ's optimistic forecasts."

Added to that, there is increased uncertainty over the growth outlook stemming from the US and China.

"The recent Canterbury earthquake only serves to reinforce our expectations of a September meeting pause, given uncertainty over the net effect of the earthquake on economic activity and the potential for greater business fragility," ASB said.