THE high New Zealand dollar could see the Reserve Bank hold official interest rates for longer, with the first rate rise in April, some economists say.
The Reserve Bank's final Monetary Policy Statement of the year is due out on Thursday. The official cash rate is widely expected to stay on hold again. The cash rate has remained unchanged at 2.5 per cent since April 2011 and has been extremely low since early 2009.
ASB Bank chief economist Nick Tuffley said the New Zealand dollar had risen since the last Monetary Policy Statement in September, which may see a lower inflation outlook and prompt a later start to interest rate rises than March.
ASB still forecast the first rate rise in March, with rates rising 75 basis points in 2014 and again the following year.
But "largely because of the strong New Zealand dollar, the risks look increasingly skewed towards a later start", ASB said.
The New Zealand dollar was trading close to US82c late last week, after peaking above US85c in October. It has also moved up strongly against the Australian currency, to more than A90c, from about A86c three months ago.
If the growth forecasts from the Reserve Bank looked robust and unlikely to move higher, it was hard to see what would spark a rate hike in January or March, other than a "materially lower" dollar, ASB said.
Westpac chief economist Dominick Stephens said they expected the Reserve Bank to say this week that rates would rise, but not until around April.
"The economy may be strong, but the new high LVR mortgage restrictions are too fresh and the exchange rate too high, for the Reserve bank to contemplate hiking the OCR earlier than previously advertised," Stephens said.
Less than a week after the September Monetary Policy Statement, the US Federal Reserve shocked financial markets by not "tapering" its economic stimulus programme as widely expected. The New Zealand dollar soared.
On a trade-weighted basis, the currency has been about 3 per cent higher than assumed in the September Monetary Policy Statement.
The currency is likely to remain well-supported, with New Zealand's terms of trade up 7.5 per cent in the September quarter to a 40-year high. There is a clear link between the terms of trade and the currency, with rising world dairy prices pushing up the dollar again last week.
With the dollar higher than expected and all else equal the Reserve Bank would become more reluctant to hike the OCR, Stephens said.
Boiled down, the Reserve Bank faced both stronger economic conditions and a higher exchange rate than expected. Those surprises roughly offset each other and mean a similar intent as in the September MPS.
Deutsche bank chief economist Darren Gibbs said it was "extremely likely" the Reserve Bank would hold official interest rates on December 12.
But Deutsche Bank expected official interest rates to rise about 100 basis points in 2014, probably starting in March. That would depend largely on developments in the housing market and the exchange rate. The central bank was likely to discourage thoughts that they could start raising rates as soon as January.
- © Fairfax NZ News
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