Economists ponder Wheeler's attitude as markets see rate cut

Tuesday 23rd October 2012

Economists and the market differ in their guesses on how new Reserve Bank governor Graeme Wheeler will approach monetary policy, though on the face of it there's little reason to change interest rates at his debut review this week.

All 15 economists in a Reuters survey expect no change to the official cash rate, which has been at 2.5 percent since March last year, on Thursday. Traders, though, see a 13 percent chance of a cut this week and 26 basis points of cuts over the next 12 months.

The New Zealand grew 0.6 percent in the second quarter, twice the expected pace, while inflation slowed to an annual pace of 0.8 percent in the third quarter, below the central bank's target for a rate on average over the medium term of 1 percent to 3 percent. Tame inflation has helped stoke market bets Wheeler could have more of a tendency to ease, which he may hint at this week, if not act on.

"For what it is worth, our thinking is that the incoming governor will start his term calmly and cautiously," said Dominick Stephens, chief economist at Westpac Banking Corp. "The most prudent course of action would be to keep the OCR on hold and issue a statement that is ambivalent about future OCR changes."

Second-quarter economic growth was fuelled by milk production after a bumper season that is unlikely to be repeated in the current season. Inflation was weaker than expected. Falling transport related costs trimmed inflation in the third quarter of 0.3 percent, resulting in the first time annual inflation has dropped below the target band since 2002.

The kiwi dollar remains stubbornly high, which keeps a lid on imported inflation, while the global economy remains subdued, with Europe lurching into recession and talk that the Bank of Japan will ease policy as soon as next week. China's growth is slowing though it has avoided a so-called hard landing.

At the last review of monetary policy on Sept. 13, the central bank said the OCR would likely not change until late 2013 - later than some market participants had expected.

Wheeler is a former executive at the World Bank and most recently ran a consultancy in the US. He has signed a policy targets agreement with Finance Minister Bill English that is broadly unchanged from the one inked by predecessor Alan Bollard. Still, he said at the time it was signed last month that tweaks to the PTA gives the bank more authority "to lean against the build-up of financial imbalances" in the economy.

That's been interpreted in some quarters as meaning he would have leaned more against the build-up of any bubble in asset prices than Bollard did, for example in the surge in house prices before the global financial crisis.

"We have no reason to believe that governor Wheeler will prove significantly more dovish than his predecessor," said Darren Gibbs, chief economist at Deutsche Bank. Still, reports such as the CPI for the third quarter and the performance of manufacturing index have "marginally advanced" the case for policy easing.

"We think that a good case for further easing can be made," he said. "Real interest rates do not seem low to us considering the economy's weak trend growth rate."

BusinessDesk.co.nz

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