Weaker growth expected to see OCR stay low all year

The market believes there's a less than 50 per cent chance of any Reserve Bank rate increase this year.
MAARTEN HOLL/FAIRFAX NZ

The market believes there's a less than 50 per cent chance of any Reserve Bank rate increase this year.

Weaker than expected growth is likely to see the Reserve Bank leave interest rates on hold this week, with any rises looking increasingly distant.

On Thursday the Reserve Bank will announce its latest review of the official cash rate (OCR), with economists expecting no change this week, or for months to come.

Earlier this year market pricing of financial products tied to interest rates suggested the OCR would probably be increased from the current 1.75 per cent in August.

A string of weak data in recent weeks has softened expectations, with pricing suggesting the market believes there is a less than 50 per cent chance of any increase this year.

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The OCR has a strong influence on the cost of mortgages and the returns on savings in New Zealand. However, a move towards higher global interest rates, driven by moves in the United States, has caused consumer interest rates to drift higher in New Zealand, even as the OCR stays at a record low.

In February Reserve Bank forecasts suggested the OCR could be unchanged for two years, while in a speech in early March Governor Graeme Wheeler said there was an even chance that the next move could actually be a cut.

On March 16, official figures showed that the economy expanded by 0.4 per cent in the final three months of the year, well below the 1 per cent the Reserve Bank had expected. Growth in the September quarter was also downgraded.

Westpac acting chief economist Michael Gordon said there had been a "significant shortfall" between what the Reserve Bank had expected and how the economy had performed.

"[T]he balance of economic news in recent weeks has been on the softer side, making the case for an OCR increase look even more distant," Gordon said.

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First NZ Capital director of economics Chris Green said that with gross domestic product per person falling marginally in the final three months of the year, there was nothing to change the view that the OCR would be unchanged until 2018.

ANZ chief economist Cameron Bagrie said the economic growth figures painted an unflattering picture of the economy.

"It is of course never pleasant to see things like real activity contracting in per capita terms or annual growth falling back below 3 per cent at a time when core inflation is not yet back to target," Bagrie said.

"But the underlying story is better than this."

BNZ said the likelihood that inflation would soon return to 2 per cent, combined with signals of stronger interest rates and a weaker kiwi dollar should prompt the central bank to signal that it would probably increase the OCR in the future, a "tightening bias".

 - Stuff

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