Westpac chief economist Dominick Stephens is
contemplating shifting his call for the first rise in the
Reserve Bank's official cash rate to April, from the current
consensus of March.
The central bank will tomorrow release its OCR review.
Mr Stephens said he expected the overall tone of the review
to be ''slightly more dovish'' than the September Monetary
''Over the course of this year, the Reserve Bank has been
gradually building the case for higher interest rates. Its
forecasts have been steadily revised in the direction of an
OCR hiking cycle beginning earlier, being greater in extent
and, in its rhetoric, becoming more pointed.
''We expect the October OCR review will break with that
trend. This time, the Reserve Bank may sound just a little
more hesitant about hiking the OCR early, on account of the
high exchange rate.''
The central bank had been grappling with three key questions
which could affect the timing of a rate rise, he said.
They were. -
• What would happen to the housing market now restrictions on
high loan-to-value (LVR) mortgage lending had been enacted
for financial stability reasons?
• To what extent would the Canterbury rebuild and national
recovery in construction activity generate inflation
• To what extent would the high exchange rate depress
inflation?Mr Stephens said it was too soon for reliable
information to emerge regarding the impact of LVR
restrictions on house prices.
Recent developments regarding the construction boom and
inflation pressure had probably bolstered the case for OCR
hikes. Indicators of economic activity had been stronger than
the Reserve Bank anticipated and September quarter inflation
was slightly higher than forecasts.
''Importantly, there are increasing signs nationwide
construction cost inflation is gathering a head of steam.''
The most important change since September was the exchange
rate, he said.
The trade weighted index, a basket of currencies from New
Zealand's trading partners, had risen 4% while in September,
the Reserve Bank predicted an unchanged exchange rate.
The balance of risks was skewed towards a fall in interest
rates. If tomorrow's review followed Westpac expectations by
acknowledging the outlook for the OCR was conditional on the
exchange rate, swap rates would probably fall slightly. If
the Reserve Bank opts for a more extreme option, swap rates
would fall sharply.
''Our own forecast, unchanged since April, has been the
strength of the domestic economy would force the Reserve Bank
to begin the OCR hiking cycle in March 2014. However, recent
developments are starting to point to a later start date.
"Subject to Thursday's OCR review being along the lines we
expect, we are likely to shift our call to forecasting an
April 2014 start date to the OCR hiking cycle,'' Mr Stephens