No change expected in OCR

There appears no chance of the Reserve Bank lifting its official cash rate above 1.75% on Thursday, if the experts are to be believed.

Bank economists are united about the central bank keeping the OCR on hold but are divided on when interest rates will start to rise. The earliest prediction is for mid-2018 through to the latest some time in 2019.

Craigs Investment Partners broker Chris Timms said yesterday the focus on the Reserve Bank announcement would be on any changes in tone or commentary.

``We shouldn't expect a lot in this regard. The Reserve Bank is likely to retain a similar rhetoric to what we saw in early May.

``Local inflation is the key thing that could sway the Reserve Bank and there is no new data on this front.''

The March quarter Consumer Price Index inflation figures, released in April, were much stronger than expectations.

However, the Reserve Bank was likely to see more evidence of a trend before altering its position.

The June CPI figures were set for release in the middle of next month and it was the August meeting when the central bank could respond, Mr Timms said.

``The soft economic growth figures for the March quarter is one area where we will be looking for any commentary on.''

Another notable development the Reserve Bank would almost certainly discuss was the rebound in the currency. Since the last Reserve Bank meeting on May 11, the New Zealand dollar was up 5.8% against the US dollar, 6.8% against the pound and about 2.5% higher against the Australian dollar and the euro, he said.

Westpac senior economist Satish Ranchhod said if there was anything that could surprise the market, it was the Reserve Bank deciding to escalate the language around its neutral stance.

In a statement following the May monetary policy statement, the Reserve Bank emphasised, ``There is an even chance of a hike or a cut in the future.''

Repeating those words on Thursday would not be a shift in position. But elevating them to the OCR statement itself could wrong-foot financial markets which were still pricing in a return to rate hikes by mid-2018, he said.

Last week's economic growth figures (gross domestic product) would amplify the Reserve Bank's concerns about the economy.

GDP growth was again much softer than expected - up 0.5% against the Reserve Bank's forecast of 0.9% - and much of the shortfall was due to a drop in construction.

``We don't think the slowdown in construction will be sustained, given the amount of work in the pipeline. Nevertheless, it will play into the Reserve Bank's concerns about a weaker-than-expected starting point for the economy,'' Mr Ranchhod said.

Immigration figures, also due on Thursday morning, were likely to remain ``robust'', Mr Timms said.

Net migration slipped in April, falling to 5780 from 6130 in March, although annual net migration was unchanged at 71,900, equalling the record high set a month earlier.

It was difficult to see anything other than migration remaining at strong levels. Something to watch this time would be any boost to tourism as a result of the early arrivals of British and Irish Lions supporters, although most of the impact would be in next month's data.

The latest GlobalDairyTrade (GDT) auction results were due tomorrow morning. Futures were suggesting a flat to slightly lower result, Mr Timms said.

Two weeks ago, the GDT index increased for the sixth consecutive rise.

Prices were ``essentially flat'' to where they began the year, having fallen more than 10% through to March but rebounding more recently. Compared with a year ago, the GDT index was up 57%.

Global Performance in Manufacturing indices were due out this week. Japan was the first to report at noon on Friday (New Zealand time), followed by Europe at 8pm and the United States early Saturday.

Last month, the Japanese PMI improved to the strongest level in three months. Output volumes and new orders both looked healthy, he said.

Europe remained strong and the May composite PMI remained unchanged from April's six-year high.

``The June readings will be of interest as the survey will have taken place after the second round of the French election so we might see how this has affected sentiment.''

The May US PMI declined for the fourth consecutive month. While it remained above 50, it was the lowest since September last year, Mr Timms said.


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