Lower rates favoured more than higher by shadow board

Wednesday 30th January 2013

The members of a "shadow board" looking over the shoulder of Reserve Bank of New Zealand governor Graeme Wheeler are more in favour of a cut in the official cash rate than a rise.

Economists widely expect Wheeler to hold the official cash rate at 2.5 percent on Thursday and that is also the official line of the New Zealand Institute of Economic Research's (NZIER) shadow board.

Ahead of the decision, economists have noted that Wheeler has tough call in weighing a strong property market, fuelled further by the Christchurch rebuild, against a stubbornly weak economy.

The shadow board puts a 56 percent chance on a hold at 2.5 percent, but graphs revealing the thinking of individual members show an easing bias.

Dave Taylor, the chief executive of New Zealand Steel & Tube, gives a cut to 2 percent a 60 percent weight and a cut to 2.25 percent a 40 percent weight, while Business New Zealand chief executive Phil O'Reilly is 50/50 between hold and cut to 2.25 percent .

Victoria University professor Christoph Theonissen is 80 percent in favour of a hold and colleague Viv Hall sits on 85 percent, while independent member Luke Bunt is 95 percent in favour of a hold.

The professional economists are more skewed to a rise, with BNZ chief economist Stephen Toplis assigning a 15 percent chance to a rise to 2.75 percent and 5 percent chance to a rise to 3 percent with a 60 percent weight to hold.

NZIER's Shamubeel Eaqub sits in the easing camp with only a 5 percent weight to a hold and a range of chances to various levels of cut, the biggest being a 45 percent weighting on an OCR of 1.75 percent.

Cameron Bagrie, chief economist at ANZ National, is evenly divided with a 60 percent weight on hold and 20 percent on either a quarter-point cut or rise.

"The NZIER shadow board says hold the official cash rate at 2.5 percent is the right call," says Kirdan Lees, head of public good research at NZIER.

The economy has little momentum and unemployment remains high. Inflation is low. But the Auckland property market is hot and there will be pockets on inflation from the Canterbury rebuild.

"Lowering interest rates further has more support that raising rates at this point," Dr Lees said.

BusinessDesk.co.nz

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