Another rise in the official cash rate by the Reserve
Bank tomorrow is almost a given but, more importantly, markets
will be seeking signals from the central bank about its next
The Reserve Bank moved the OCR from 2.5% to 2.75% last month
and is expected to raise it again tomorrow to 3%.
But economists are asking what next, as the dollar continues
to hover close to recent highs and dairy prices continue to
The New Zealand Institute of Economic Research's shadow board
supports another interest rate hike.
The board is made up of various economists, academics and
NZIER senior economist Kirdan Lees said support for an
interest rate rise to 3% was very high.
''The recovery in the economy is broadening. Households are
starting to spend more after years of putting many decisions
on hold following the Global Financial Crisis.
"Businesses are buoyant and are returning to normal
investment patterns. The Christchurch reconstruction effort
continues to leap ahead.''
Stronger consumption and investment would lift wages and
prices. A rate hike now would help dampen inflation, Dr Lees
There was some support for holding rates to acknowledge the
risks of a sharp drop in Auckland house prices or a downturn
in China's economy that would significantly affect global
markets and the New Zealand economy, he said.
However, ASB chief economist Nick Tuffley said while events
since the March OCR increase had reinforced the broadening of
the economic recovery, there was still concern over dairy
prices and the dollar.
The ASB assessment was the Reserve Bank would be factoring in
- at the margin - interest rates needing to do fractionally
less work in the future.
''Assuming an April OCR hike is a given, the two key areas of
significance lie in: what signals, if any, are there that the
Reserve Bank is likely to hike in June and are there any
signs the Reserve Bank has changed its view on the extent of
the overall tightening cycle?''
Of those, the first was likely to bear the most fruit, Mr
The main factors for the Reserve Bank to assess were dairy
prices and the New Zealand dollar. Both imply, for now,
interest rates would not need to do as much to contain
Fonterra's GlobalDairyTrade platform had registered five
consecutive falls, of 20% in total, over recent months, he
said. Prices had been expected to fall this year but not to
the extent seen and not as quickly, he said.
''In our view, the farm-gate milk price for the current
season should be closer to $8.40 kg ms than Fonterra's $8.65
"At this point, we are maintaining our forecast for next
season of $7.80 kg ms, though such an outcome will depend on
some NZ-US dollar weakness and a more favourable milk
powder/cheese price differential at the seasonal peak than
Fonterra faced last year.''
Part of the reason for the weakening of the dairy prices was
the extent of production, Mr Tuffley said.
He estimated total production would be up 11% from last year.
Those volumes would partly offset the price impact, although
the extra production was not costless.
The drop in dairy prices reinforced the peaking of the terms
of trade and dairy incomes not being as ''stunningly
spectacular'' next season.
Of some consternation to the Reserve Bank was the dollar
remaining strong, even as dairy prices fell.
The dollar had not been performing its buffer function of
falling to offset the weaker global prices.
''It is entirely possible - and appropriate - the dollar does
fall and catch up to this particularly fundamental.
"But the Reserve Bank also faces the uncomfortable reality it
is going it alone among the developed world in lifting
interests and that makes New Zealand stand out among global
There was the risk the New Zealand dollar was stronger for
longer and that risk might start to colour OCR decisions
beyond April, Mr Tuffley said.
At a glance
• OCR expected to rise to 3% tomorrow
• Signals sought from Reserve Bank over future OCR moves
• Dairy prices expected to keep falling
• New Zealand dollar expected to stay strong