RBNZ to hold cash rate steady
After a reluctant rate hike at the last cash rate meeting, the Reserve Bank of New Zealand will likely keep the cash rate unchanged on Thursday as it downgrades near-term growth forecasts and also inflation projections.A pause in the cash rate will give the RBNZ time to assess the impact of the Canterbury earthquake and the effect on GDP from rebuilding efforts in that part of the country.The RBNZ effected two consecutive rates hikes at the last two meetings to three per cent, but the tone of the last statement suggested that the next announcement would be to leave the rate unchanged because the outlook for economic growth had softened.Since then all leading economic indicators have pointed towards slowing growth, and also slowdown in the inflation rate. Governor Alan Bollard in a speech last month said that the Reserve Bank's expectation of the peak in inflation had eased back to around 5 per cent or just below. In the June monetary policy statement the peak for inflation was projected to rise to 5.3 per cent in the second quarter of 2011. Inflation as measured by the consumer price index rose 0.3 per cent on-quarter in the June quarter and 1.8 per cent on-year. This compared with the RBNZ's projection of a 0.5 per cent and two per cent rise respectively.Retail sales fell 0.4 per cent in July, when expectations were for flat sales while house sales dropped 2.8 per cent in August.Business loans dropped 7.4 per cent in July to decline for the twelfth straight month, consumer loans fell 2.0 per cent, housing loan growth slowed to 2.6 per cent to mark the slowest pace of growth since September 2009 and agriculture loans rose just 2.3 per cent, which was the least growth in at least eighteen years.While growth outlook has definitely softened the RBNZ will now need to gauge how much and for how long growth would slow before rebounding in the wake of the Canterbury earthquake.In its economic impact statement, the Treasury projects the earthquake to have a negative impact of around 0.4 per cent on GDP in the September quarter. But recovery efforts would boost 2011 June year GDP by around 0.5 per cent and by 0.3 per cent in 2012 June year GDP, Treasury estimates.The type of boost would depend on various factors like the existing work the recovery activity would replace, whether new goods are imported or locally made, the proportion of destroyed buildings replaced and the impact on tourism.