Reserve Bank governor Alan Bollard has decided to leave interest rates alone for the time being, with the official cash rate (OCR) left unchanged at 2.5 percent in October. However, despite this record low figure, there is speculation in some quarters that interest rates may drop even further during the next six months.

Alan Bollard spooked the financial markets slightly in late October, after speaking of declining business confidence and a weakness in recent inflation and growth data. National inflation rose by only 0.4 percent during the September quarter, which was only just above half the expected figure of 0.7 percent.

However, according to Westpac chief economist Dominick Stephens in an interview with landlords.co.nz, "There was no overt change in how the Reserve Bank sees the outlook for the economy or monetary policy -- The market's read that as the Reserve Bank saying: I see the weaker data but I'm not going to change my plan." Not only has there been no rise in the OCR, some analysts are even suggesting that a further cut is likely.

According to HiFX Senior Dealer Dan Bell in an interview with Bernard Hickey on interest.co.nz, there is now more chance of an OCR cut than a hike over the next six months. "If we see a further blowout in the European debt crisis and that impacts on global credit markets, which it already is, then the cost of borrowing for our banks is going to go up, and potentially we're going to be paying more for our debt, both for households and businesses," said Bell.

"The Reserve Bank is sitting tight with the OCR at 2.5%, but if borrowing costs are going up and we're paying more for our overseas debt, then potentially we need to see a rate cut just to keep interest rates where they are. I can't see interest rates going up any time soon. Talking to our clients, many importers and exporters, a lot of small to medium sized businesses, it's still pretty tough going out there." added Bell.

Although he didn't mention it, the strength of the domestic currency would have also influenced Bollard's decision to leave the OCR unchanged in October. However, the dollar has weakened since then due to the ongoing financial crisis in Europe. According to Bell, there is a risk that the current interest rate advantage is not enough to prop up the dollar, which adds to speculation that another cut will be needed.

Not everyone is expecting the OCR to fall however, with Nick Tuffley, chief economist at ASB Bank, one of many economists still expecting the OCR to rise sometime between December and March. At the moment however, the situation remains unchanged, as the Reserve Bank attempts to analyse the implications of the European situation and what it means for New Zealand.

(Article Published By Edge Mortgages)