Bollard will hold off any rate rises - for now

Expect a shift in the Reserve Bank’s stance on Thursday.

It will not – barring a financial meltdown over the next 72 hours – be a cut to the official cash rate.

At 2.5%, the OCR is already at a historic low.

However, governor Alan Bollard and the overnight index swap (OIS) markets have been gradually tilting away from the view that an OCR rise is likely later this year.

Indeed, the OIS markets have priced in a rate cut by the end of winter.

Dr Bollard will do what the Reserve Bank of Australia last week, and disappoint the markets. The RBA cut its OCR, but only 0.25%, when the markets had priced in a 0.5% cut.

Dr Bollard will leave open the chance of a cut when he releases his quarterly monetary policy statement on Thursday morning, pointing to continued uncertainties offshore, especially in Europe, and a flatter-than-expected domestic economy.

But those offshore uncertainties are one reason the Reserve Bank will hold off a cut. In the event of a eurozone-triggered financial seizure, he will want room to cut the OCR to provide relief to the economy at that point.

Some pressures have come off. Monetary policy is actually looser than it was a the time of the last review, because the New Zealand dollar has fallen from slightly below US83c to below US76c, with a brief recent rally taking it to US76.96c at 7.45am today.

As is normally the case, much of the drop is caused by offshore uncertainties. But some also seems to be the hint, at the last review, that any rise in the OCR will be further off than markets had previously anticipated.

The drop in the currency takes some of the pressure for a rate cut off.

There is no doubt the New Zealand economic performance since the last review of the OCR has been lacklustre.

Domestically, retail sales have returned to pre-Rugby World Cup levels, exporters are – as expected – now seeing lower returns as commodity prices drop, and the government’s budget has confirmed a path which, while not the “austerity” claimed by political opponents, is still a fiscally contractionary one.

Housing has shown signs of picking up but improvements are highly localised and is driven by demand for new houses in Auckland and Christchurch rather than being a return of confidence by property investors.

This is despite the fall in retail interest rates over the past month.

That retail rates drop is another reason Dr Bollard will hold off this week. With the rates able to move downwards there is no particular need for any confidence-boosting cut in the OCR.

Again, it is another reason to hold off, and to save any OCR cut for an economic rainy day.

But this will still be a shift away from the previous stance, which implied the only next move could be upwards.