9 Mar 2015

Economists look for clues to rate cut

5:44 am on 9 March 2015

The Reserve Bank is expected to hold interest rates steady this week, but economists will be interested to see how wide it opens the door to the possibility of a rate cut.

One economist, Annette Beacher, is actually forecasting a cut in the official cash rate by quarter of a percentage point to 3.25 percent on Thursday, citing the much higher-than-expected New Zealand dollar and the collapse of inflation expectations.

However, Westpac economist Satish Ranchod said conditions had not changed much since last month, when the central bank governor Graeme Wheeler explained why he was no longer expecting to raise rates.

"While the economy is looking at low inflation over the coming year, the outlook for domestic demand is quite strong and that's likely to lead to a pickup in inflation pressures further ahead," said Mr Ranchod.

"If the Reserve Bank was to cut rates now it would risk super-charging demand conditions in the economy and that would be of particular concern for conditions in the housing market."

He said the recent drop in inflation expectations was partly a response to the decline in petrol prices.

"If we look at broader conditions in the economy, we're growing at quite a robust pace. As we begin to see that stronger economic activity passing through into prices, it's likely that we'll see inflation expectations pick up and that will be of some relief to the Reserve Bank."

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