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NZ Reserve Bank expected to hold but rates cuts 'inevitable'

interest-ratesThe tide is turning in favour of the Reserve Bank cutting official interest rates.

New Zealand's official cash rate is expected to stay at its record low this week, but the Reserve Bank is expected to signal a cut in the coming months.

On Thursday Reserve Bank governor Graeme Wheeler will review the OCR and deliver his first full set of economic forecasts for the year.

In January Wheeler said cuts OCR - which directly influences mortgage repayments and the returns on savings - "may be required" to stoke inflation, but Wheeler later gave speeches playing down the prospect of cuts in the near future.

Since then the Reserve Bank's own surveys have showed expectations for inflation have fallen to the lowest level in more than decades, and increasingly economists expect the OCR to be cut to a record low, probably in June.

On Tuesday the New Zealand Institute of Economic Research's shadow board, made up of economists and business figures, predicted rates would be left unchanged. However seven of the nine members lowered what they believed the ideal rate setting should be, dropping to an average of 2.43 per cent.

Cameron Bagrie, chief economist of ANZ in New Zealand, said that a record low OCR now seemed "inevitable".

On February 29 ANZ joined Westpac and ASB in forecasting that the OCR would drop to 2 per cent by the end of this year.

While Bagrie said that the New Zealand economy was showing reasonable momentum, the weakening international outlook, and signs that bank funding costs could be rising were "wildcards" for the economy.

"It seems inevitable they will eventually drag the OCR lower."

Arthur Grimes, the Reserve Bank's former chairman maintained that it was best for the central bank to wait and see for now.

"If domestic inflation does not pick up, then an OCR cut could become warranted but the central bank has to be wary about reacting pro-cyclically by cutting just as inflationary pressures rise."

Stephen Toplis, head of research at BNZ, is increasingly a lone voice that the Reserve Bank should not cut interest rates, arguing that there is no point. He has been claiming for weeks that the impact on financial stability, through the risk of increasing asset prices and creating a bubble, outweigh the benefits of lower interest rates.

"Moreover, it is highly doubtful that lowering the cash rate would lift inflation anyway."

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