OCR may stay low until June 2013 MPS

Reserve Bank governor Alan Bollard may use his swansong interest rate review this week to keep conditions unchanged as modest growth in the New Zealand economy is being offset by a tepid global outlook.

BUSINESSDESK: Reserve Bank governor Alan Bollard may use his swansong interest rate review this week to keep conditions unchanged as modest growth in the New Zealand economy is being offset by a tepid global outlook.

Dr Bollard will keep the official cash rate at 2.5%, according to a Reuters survey of 18 economists.

It will not move until June next year at the earliest, based on the median of expectations. The rate has not budged since March last year from the lowest since it was introduced in March 1999.

The monetary policy statement, Dr Bollard's last before handing over the job to former World Bank executive Graeme Wheeler.

That means economists may not try so hard to read the nuances of the statement, given that Mr Wheeler is likely to develop his own style and "language".

"For all we know ... Wheeler may have a markedly different view on where monetary policy should be heading," says Dominick Stephens, chief economist at Westpac Banking Corp.

"The soon-to-be-signed Policy Targets Agreement could provide some early clues on this matter, but more likely it will take a few months in the hot seat before any differences become apparent."

The MPS on Thursday comes seven days before economic growth figures for the second quarter, which may show gross domestic product slowed from the first quarter's 1.1% pace. Economists at UBS New Zealand are forecasting a 0.5% expansion in the latest quarter.

"We expect the message to be that the domestic economy is on track to 'grow modestly' but that a 'poor' external outlook means that it remains appropriate for the OCR to be held at 2.5%," says Robin Clements, economist at UBS.

Annual inflation is sitting at the bottom of the central bank's 1% to 3% target range and some economists say it may have slowed further in the third quarter. At the same time, the New Zealand dollar has remained stubbornly high.

On a trade-weighted basis it hasn't been below 70 since early June, at the time of the central bank's last MPS, and was recently at 72.55, above the 69.20 average the bank forecast back then for the third quarter.

There are arguably enough forces afoot to keep the kiwi relatively strong against the greenback and the euro, with US and European central banks preparing to provide more stimulus while keeping interest rates low.

The kiwi could also gain against the Australian dollar as talk revives that the RBA would be willing to cut rates again.

"The prospect of further policy easing in Australia could see the NZD drift higher against the AUD, with weakness in this cross rate, up to now, being a saving grace for some exporters given the strength seen against other currencies," says Darren Gibbs, chief executive at Deutsche Bank.

He expects this week's MPS will adjust higher the track for the TWI while keeping the forecast track of the 90-day bank bills unchanged at 2.7% until the second quarter next year, when it is seen rising to 2.9%.

Figures last week showed Australia's economy grew 0.5% in the second quarter, just below the 0.6% expected by economists and down from the first quarter's 1.4% pace.

China's economy grew at a year-on-year pace of 7.6% in the second quarter, the slowest in three years.

While the outlook for Europe may have improved since the June MPS, that "has been offset by growing concerns about China and the possible knock-on effects to Australia – New Zealand's top two trading partners," Westpac's Stephens says.

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