ASB rethinks rate rise date

19:23, Aug 12 2014

The recent dive in dairy prices and a still high dollar mean the Reserve Bank is expected to hold the official cash rate steady till March next year, say ASB Bank economists.

HSBC economists, meanwhile, said falling dairy prices had created doubts about the robustness of New Zealand's economic boom, but the price drop may be only temporary.

And it was worth keeping in mind that dairy was only one part of the economy's recent growth story, HSBC said.

Previously, ASB expected the central bank to make its next OCR move up in December, but it has now pushed that out to March.

However, while the pain may be delayed for borrowers, they should still expect rates to rise four more times next year, in March, June, September and December, ASB said.

The OCR would peak at 4.5 per cent by the end of 2015.


ASB said without a big rebound in dairy prices or a sizeable fall in the currency, interest rates would have to stay lower for longer.

Dairy prices have slumped about 40 per cent on the GlobalDairy Trade index, from a recent peak in February. As a result, Fonterra has slashed its forecast farmgate milk price to $6 a kg, from last season's $8.40 a kg.

A longer pause for the OCR would help buffer the economy from lower dairy prices and the continued strength in the New Zealand dollar, ASB said.

Recent inflation figures also suggested the Reserve Bank had time on its side. Despite strong building sector growth, construction sector labour costs were moderating in Canterbury.

Headline inflation was also still in the bottom half of the central bank's target band and was not expected to hit 2 per cent, the mid-point of the band, until the middle of next year.

A cooling housing market should also be a comfort to the Reserve Bank, ASB said. National annual house price inflation hit 10 per cent late last year. QV figures show national values for July were up 7.6 per cent over the past year.

While picking March for the next rise in the OCR, ASB said it could come sooner if there was a sharp drop in the New Zealand dollar or a strong rebound in dairy prices. Stronger-than-expected net migration might also be factor in an earlier move, ASB said.

HSBC chief economist Paul Bloxham said dairy was only part of the picture, with recent growth in New Zealand also driven by post-quake rebuilding in Canterbury, a rise in home building in Auckland and strong net migration.

All up, gross domestic product growth was still expected to be above trend this year and next.

And there were also good reasons to think the slump in dairy prices could be temporary.

HSBC said it was likely dairy prices would improve in coming quarters. World dairy auction prices had fallen after China ramped up stocks of dairy products late last year and had since run them down.

In the medium term, demand for dairy products was expected to be "well supported" as incomes rose in Asia's middle-class.

HSBC expected the Reserve Bank to lift the OCR again before the end of the year.

The Dominion Post