Rates tipped to pause after rise

JAMES WEIR
Last updated 05:00 21/07/2014

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The Reserve Bank will likely lift official interest rates on Thursday, but then put rates on hold, possibly until next year, economists say.

But once it has hit the pause button, the central bank could try to knock down the high currency by selling New Zealand dollars, according to Westpac Bank.

The Reserve Bank is widely expected to lift official interest rates to 3.5 per cent this week, despite the shock slump in dairy prices last week, falling export log prices, no sign of rising inflation and a still sky-high currency.

The move would push up floating mortgage interest rates, now sitting at about 6.45 per cent.

Westpac chief economist Dominick Stephens said the Reserve Bank's rate rise this week was no longer a "done deal" but on balance the central bank was still expected to lift rates 25 basis points. But then there would be a pause till January next year, rather than Westpac's earlier expectation of another move up in December.

After lifting the cash rate this week, the Reserve Bank might consider intervening in the currency market to bring the dollar down, Westpac said.

The dollar, trading about US86.8c late last week, has refused to fall even with the big slumps in dairy and log prices. The central bank would prefer to see the currency lower and interest rates higher, to control the housing market.

Before intervening in the currency market, the Reserve Bank has to tick four boxes.

The currency must be at "extreme" levels and be "unjustified". Intervening has to be consistent with monetary policy and it must be "opportune" - and so likely to work. Westpac said it should also have a decent chance of being profitable in the long run. The central bank would make a profit if the currency fell.

While the currency had long been at extreme and unjustified levels, it has been doubtful that intervening would actually work up till now. Selling the dollar now and then raising interest rates within days would be "intervention harakiri", Westpac said.

But once the Reserve Bank officially put rates on hold, "opportune moments could arise" Stephens said, if the currency looked vulnerable to a fall.

Deutsche Bank said it expected a rate rise this week, but unless there was a rebound in dairy export prices or a fall in the currency, the next move up would probably not happen till next year.

While the rate rise this week was "widely expected" the outcome had become much less certain after the big fall in dairy prices and a "relatively friendly" June quarter inflation report.

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