Banks split on timing of interest rates climb

Economists will likely be poring over Thursday's official cash rate announcement with extreme care for hints as to when the Reserve Bank will start tightening monetary policy.

The central bank is widely expected to keep interest rates on hold at 2.5 per cent - a historically low level that has been maintained since March 2011 in a bid to boost the struggling Kiwi economy in the wake of the Canterbury earthquakes.

Certainly the recent run of data suggests the long-anticipated rebound has yet to emerge, with the economy growing at a 0.2 per cent pace in the September quarter (below forecasts of 0.5 per cent). Additionally, inflation came in below the Reserve Bank's target band in the last three months of 2012. But assessing just how weak the economy is, and when exactly the Canterbury earthquake rebuild will jolt it back on the growth path, has major banks divided on when rates are likely to start moving upwards.

BNZ and Westpac are betting the central bank will hike rates by a quarter of a percentage point in December this year, while ASB and ANZ have pushed their bets out to March 2014.

That split is reflected in the broader market, with the overnight index swap curve, pricing in a 5 basis points hike in 12 months.

Jane Turner, a senior economist at ASB, says the elevated level of the New Zealand dollar, which is expected to remain in the mid-US80c range, will keep tradeable inflationary pressures lower for longer, and weaker consumer inflation suggests the Reserve Bank has room to move later rather than sooner.

Similarly, ANZ chief economist Cameron Bagrie believes the central bank has breathing room to act, even though concern is growing about the pace of housing prices credit growth.

Reports the Reserve Bank was researching macro prudential tools last year sparked widespread speculation the central bank might resort to non-standard measures - such as tweaking the loan-to-value ratio on mortgages - to cool housing and credit markets without having to move the official cash rate.

On the more bullish side of the spectrum, BNZ sees the pickup in activity from Christchurch flowing through into the economy sooner than any of the other banks.

The economy is also expected to be aided by moderate global growth, with solid demand for Kiwi-produced goods from Asia.

"Fundamentally it comes down to the recovery story and the pressure on supply side inflation if the kiwi doesn't push higher but just stays higher for longer," said BNZ economist Doug Steel.

Westpac is of a slightly more moderate view but chief economist Dominick Stephens still expects the Canterbury rebuild and buoyant housing market to force the Reserve Bank into action. Either way, consumers can expect rates on their mortgages to remain unchanged until at least the end of the year, although that outlook is subject to change quickly.

All four bank economists said their forecasts were subject to revision, with risks from the global macroeconomic environment and unexpected swings in the currency likely to affect projections.