RBNZ OCR review unlikely to show change as euro woes linger

Article – BusinessDesk

July 23 (BusinessDesk) – The Reserve Bank is unlikely to signal any change from its assessment of monetary conditions when it reviews interest rates this week, with as much global uncertainty as there was a month ago and not enough momentum in the …

RBNZ OCR review unlikely to show change from June MPS as euro woes linger

By Jonathan Underhill

July 23 (BusinessDesk) – The Reserve Bank is unlikely to signal any change from its assessment of monetary conditions when it reviews interest rates this week, with as much global uncertainty as there was a month ago and not enough momentum in the local economy to require a change.

The central bank will keep the official cash rate at 2.5 percent on Thursday, according to all 15 economists in a Reuters survey.

Since the June 14 Monetary Policy Statement figures have shown annual inflation eased to the bottom of the central bank’s 1 percent-to-3 percent target range in the second quarter and some economists say it could sink further. At the same time, the trade-weighted index is higher than the bank had been expecting last month, keeping a lid on imported inflation. With the Spanish region of Valencia the latest place to seek financial aid, there’s little sign of improvement in the euro zone.

“Substantial question marks continue to hang over the global economic outlook and the near-term inflation outlook remains very benign,” Darren Gibbs, chief economist at Deutsche Bank, said in his OCR preview. “We expect the RBNZ to again conclude that ‘It remains appropriate for monetary policy to remain stimulatory,’ with the OCR being held at 2.5 percent.”

The Overnight Interest Swap curve shows traders are betting the OCR could be cut by 14 basis points in the next 12 months. Gibbs said the most likely trigger would be deterioration in Europe.

The TWI ended last week at 72.44, which is above the average level the RBNZ is predicting for the third quarter of 67.9.

To be sure, the New Zealand economy hasn’t fallen in a heap. Both the performance of manufacturing and services indexes show those sectors are still expanding, albeit at a slower pace.

The biggest local unknown may be when capacity constraints in the construction sector start to bite. The economic impetus of rebuilding Christchurch has been cited in the mix of economic winds since the Sept. 4, 2010, earthquake but continued aftershocks and delays in the processing of the many insurance claims has kept the work idle.

“The pickup in housing-related costs will be a key development to watch over the coming years,” ASB economists Nick Tuffley and Christina Leung said in a note. “The degree to which this pickup flows through to wider inflation pressures in the rest of NZ will be a key determinant of how long inflation pressures in the NZ economy remain contained.”

(BusinessDesk)

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