11 Jun 2012

Reserve Bank predicted to keep rates on hold

9:27 pm on 11 June 2012

ASB's chief economist expects the Reserve Bank to keep interest rates on hold at 2.5% this week but says continued turmoil in Europe is increasing the chances of a rate cut this year.

The Reserve Bank will make its latest Official Cash Rate rate decision on Thursday.

Nick Tuffley of the ASB says the bank will keep the rate on hold at this stage but will be putting a lot of focus on what's happening in the rest of the world.

"The biggest shift over the last six weeks has been that deterioration in the European situation; not just the Greek election and the uncertainty over (whether Greece will) choose to remain in the euro, but increasingly the Spanish banking system coming under pressure.

"We seem to be getting to that crunch point where over the next couple of months the European officials really need to sort something out, and that's likely to be the make or break of how successful they are in keeping the lid on this crisis."

Mr Tuffley had previously put the odds of a rate cut this year at one in 10 but, as the euro zone crisis drags on, he now estimates the chances at one in three, which he says is roughly in line with the chances of Greece leaving the euro.