NEWS / Foreign Exchange

Accentuate the positive

The Reserve Bank??™s OCR review is front-and-centre of an otherwise bare calendar this week.

The Reserve Bank was handed an awkward PR problem when government policy changes knocked some 0.3 percentage points off last week??™s Q3 CPI outturn, making inflation for the quarter a very tame 0.5% (1.8%yr). It??™s a hard sell justifying interest rates at 8.25% and a NZ dollar over 0.74USD when CPI inflation is sitting dutifully below the middle of the target band and the housing market boom looks like stopping with a painful screech.

Nonetheless, we think the RBNZ will give it a good go this Thursday. We expect a no change decision with a hawkish statement.

The CPI one-offs of lower prescription charges and early childhood education fees are exactly the sort of things that the Reserve Bank is entitled ??“ indeed obliged ??“ to look through, according to its Policy Targets Agreement. Underlying inflation pressures remain intense. We expect inflation to jump to 2.8% next quarter when the very weak December 2006 quarterly number drops out of the annual calculation, and to hit 3.3% in March.