OCR expected to stay at 2.5%

Christina Leung
Christina Leung
No change is expected today to the Reserve Bank's record low, 2.5% official cash rate (OCR), as the strength of the New Zealand dollar remains of most concern for economists.

Economists have been forecasting a rise in March, but ASB economist Christina Leung said risks were mounting towards a rate hike later than March, because of the New Zealand dollar's strength, house price outlook and residential construction outlook.

''The New Zealand dollar outlook is the most significant [risk], and the murkiest. If it persists, it would point to a delay'' Ms Leung said.

The Reserve Bank's OCR and monetary policy statement are due out today. Although there is some economic data confirming the economic recovery is gaining momentum, some developments, including house price expectations and building figures, could prompt the Reserve Bank to hold the OCR longer.

Ms Leung said ''key'' to the kiwi's outlook was the US Federal Reserve's timing to taper its economic funding programme. The central bank is stimulating the economy by buying bonds.

''The earlier the taper, the sooner the US dollar itself is likely to strengthen, and provide some countervailing force to ... the New Zealand dollar,'' she said.

Westpac chief economist Dominick Stephens said the Reserve Bank was faced with both stronger economic conditions and a higher exchange rate than previously anticipated.

He expected today's policy statement would repeat the bank's previous message that the OCR is going up, but Mr Stephens predicted that would not happen until about April.

NZIER senior economist Dr Kirdan Lees said its `Shadow Board' recommends the Reserve Bank leave the interest rate at 2.5%, but noted support was growing for higher interest rates.

''Higher rates may well be justified, because the economy is strengthening, fuelled by the Canterbury rebuild, rising asset prices and consumer confidence,'' Dr Lees said.

Offsetting some inflationary pressures was the rising exchange rate, he said.

-simon.hartley@odt.co.nz

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