This week's central bank's interest rate decision (no change expected) will be accompanied by a full monetary policy statement and updated set of economic forecasts and it is these which will be the focus.
The Reserve Bank’s outlook for the economy, rather than its interest rate decision, will be the main focus on Thursday.
Governor Alan Bollard would cause a major surprise in the financial markets if he were to cut the official cash rate from its present level of 2.5% - and Dr Bollard, by and large, does not like surprising the markets.
While the overnight index swaps (OIS) market has priced in an OCR cut over the next few months, and while at least one business group is calling for a cut, the Reserve Bank is more likely to stand pat.
The rate decision, due at 9am on Thursday morning, will be accompanied by a full monetary policy statement and an updated set of economic forecasts and it is these which will be the focus of the most attention.
Dr Bollard is likely to stress the uncertainty caused by the Eurozone debt deadlock and the possible impact, if the Euro collapses, of problems for bank funding for New Zealand banks.
Dr Bollard is likely to “soften his tone”, said Goldman Sachs New Zealand economist Philip Borkin.
Recent OCR reviews have indicated a rate rise was likely sometime in the year: the rate was on hold “for now” was the way Dr Bollard put it at the time.
The risks of contagion from some sort of financial collapse in Europe is still small but is not minor and the central bank’s Thursday statement is likely to highlight those risks.
“While not explicitly shifting to a neutral stance, it may highlight little need to hike rates in the near term and also lower its GDP forecasts further.”
Singapore-based Barclays Capital strategist Hamish Pepper said DR Bollard is most likely to continue is “wait and see approach.”
“Critically, we think the RBNZ is likely to reiterate its intention to increase the OCR through 2012 via its 90-day interest rate forecast, even if it acknowledges continuing global risks and that recent New Zealand data, including Q3 CPI inflation and labour market data, have been softer than expected.”
ASB Bank chief economist Nick Tuffley said there is no need to change the rate up or down at the stage.
Expectations about the rebuilding of Canterbury after the earthquakes – that the rebuild would both boost growth but also cause inflationary pressures – do not now feature as prominently as they did, with the most likely scenario now being no major pickup in activity there until the second half of next year.
“The RBNZ pared back its growth forecasts at the September monetary policy statement, largely reflecting its expectation rebuilding activity would occur later next year. Domestic economic developments since then have been slightly weaker than September MPS forecasts.
"Given the large degree of uncertainty at the moment, we do not expect substantial revisions to the RBNZ’s domestic outlook. Instead, we expect the RBNZ will highlight the increased downside risks to the domestic growth outlook from recent offshore development.”
