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OCR Rise Maybe Likely

Wednesday 27th April 2005

OCR Rise Maybe More Likely Than Some Commentators Suggest Says Property Institute

The New Zealand Property Institute today suggested that a possible rise in the OCR tomorrow was perhaps more likely than some commentators suggest.

This follows speculation by many economic commentators that the Reserve Bank Governor is very unlikely to raise interest rates tomorrow.

Property Institute CEO, Conor English said today, “We are not so sure that rates won’t rise tomorrow. The Governor has a difficult balancing act to perform. There is not much head room left for the Governor in his fight to ensure that New Zealand remains a low inflation economy.

“Consumer prices rose 0.4 per cent in the March quarter, pushing the annual rate to 2.8 per cent from 2.7 per cent in December. In all, 350 of the 672 items in the CPI rose in price. Statistics New Zealand state that inflation was saved from crossing the 3 per cent target band in the March quarter only by a sharp fall in international air fares of 15.8 per cent. This leaves very little room for error.
“Since then we continue to see increasing construction costs, increased petrol taxes and prices, a fall off in the inflation suppressing dollar but no significant drop in building activity. With the BOP deficit continuing to climb and increased wage demand pressure and government spending, a case could be made for a rate increase.

“In the normal course of business and given this mornings National Bank confidence survey results, the Governor might well wait another quarter before re assessing and raising rates. However, with the certainty of an election this year, and the possibility of an early election, the Governor may be conservative and raise rates now.

“The Australian Reserve Bank Governor raised their cash rate to 5.25 percent on 3 December 2003 and didn’t raise it again until 2 March this year, to 5.50 percent, well after the Australian election.

“If the OCR is raised we expect to see a continued slowing down in property market activity, a re rating of yields and a dampening of credit growth that helps stimulate the property market” Mr English concluded.


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