Interest rate rise tipped for May

By Phil Boeyen, ShareChat Business News Editor

Thursday 14th February 2002

Deutsche Bank is picking that the Reserve Bank will tighten interest rates earlier than expected with a 25 point rise in May.

The bank says it has brought forward its central expectation of the timing of the first RBNZ tightening move from August to May and believes the first rise is likely to be followed by further official cash rate increases of 25 points in early July and mid-August.

If these go ahead it would lift the OCR to 5.50% from its current cyclical low of 4.75%.

"Our central projection assumes that the OCR will reach 6.50% by mid-2003. However, that level could be reached earlier, particularly if the NZ dollar fails to appreciate and act as an offset to internal inflation pressure," the bank says.

"The change in our RBNZ call is consistent with the neutral bias expressed by the bank after its OCR review in January and the trend in domestic and international data since then."

Deutsche Bank says New Zealand employment and retail sales data have pointed to a significantly more buoyant December quarter than initially assumed by the Reserve Bank and these have continued at the beginning of the year.

"Globally, confidence indicators have continued to turn up, Euroland appears to have passed the bottom of the cycle, while US consumer demand continues to surprise on the upside.

"Buoyant domestic demand conditions and the improving global outlook, which will support the medium-term recovery in export growth, suggest that the domestic economy is unlikely to build up the slack required to ensure a swift reduction of underlying inflation to below 2%."

The Reserve Bank dropped interest rates by 1% in the wake of the 11 September events last year but Deutsche Bank says it may argue next month that, with hindsight, the full extent of the stimulus has not been needed.

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