Signals on next OCR move sought

Nick Tuffley.
Nick Tuffley.
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 move.

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 fall.

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 business leaders.

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 said.

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 Tuffley said.

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 inflation.

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 forecast.

"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 investors.''

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

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