Cash rate depends on CPI figures

The Reserve Bank's iron grip on interest rates could loosen if inflation data due out tomorrow shows any sign of life, economists say.

The central bank has kept the official cash rate (OCR) at 2.5 per cent since last April and most are predicting it to remain there until mid-2010.

But commentators are divided about whether or not the December quarter's consumer price index (CPI) figures will show a downward movement. The last CPI announcement shocked with a quarterly rise of 1.3 per cent, almost double the June quarter.

Economists say Reserve Bank governor Alan Bollard will be wary of a similar result this time around.

Westpac chief economist Brendon O'Donovan said the December figures were "critical" in light of the last quarter's findings and would either put the Reserve Bank at ease or on high alert.

Already edgy that inflation has not slumped to where he had hoped, Dr Bollard's assertion that the OCR would stay where it was till mid-year may have to change if tomorrow's quarterly figure is at all positive.

The official Reserve Bank prediction is for a 0.2 per cent drop in inflation for the three months to December, but Mr O'Donovan said Westpac was picking no change, which would push annual inflation up to 2.1 per cent.

Most market commentators were picking the figures to come out higher than Dr Bollard had predicted.

Mr O'Donovan said this would mean the Reserve Bank would need to reassess its monetary policy and raise rates as early as March, putting more upwards pressure on home loan rates.

Food prices were predicted to be the main suppressant this quarter, Deutsche Bank chief economist Darren Gibbs said, due to inflated prices for fruit and vegetables earlier in the year. House prices, while expected to rise, were not providing enough inflationary pressure yet to worry the Reserve Bank, despite the reported rebound.

ASB chief economist Nick Tuffley said an expected 2.2 per cent drop in the food price category of the CPI would counter a 1.7 per cent jump in the September quarter.

However, he said housing would continue to climb, eventually forcing Dr Bollard to push rates up, which he expected would equate to a 50 basis point rise in April.

- © Fairfax NZ News