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The massive earthquake that rocked Christchurch in early September and damaged over a 100,000 homes in the area adds to New Zealand's economic uncertainty and the central bank is likely to hold interest rates this week, economists have said.
Recent economic developments in New Zealand have been mixed. Business confidence has been on the slide and is unlikely to turn the corner any time soon, after the recent collapse of South Canterbury Finance, a major financial institution. Household confidence has also been on the wane, while the unemployment rate jumped to 6.8% in the June quarter from 6% in the previous quarter.
Analysts said the sluggish nature of recent economic indicators along with recent confidence dampening events means the central bank is more or less certain to keep interest rates on hold this Thursday.
"The economic data has given mixed messages about the pace of the domestic recovery, and the global picture has become, in the words of the [U.S. Federal Reserve Chairman Ben Bernanke], 'unusually uncertain,'" Westpac said in a note.
"The failure of South Canterbury Finance and the severe earthquake in the Canterbury region go further towards making a pause a tactful move, but the die was probably cast even before those events."
Economists warned, however, that a rate pause on Thursday will likely only be a short break with the RBNZ's long-stated plan to return rates to more normal levels as the economy recovers.
Observers expect inflation to spike in the short-term on the back of various tax rises. The central bank's latest inflation expectations survey showed businesses had raised their one-year ahead inflation expectations to 3.9% from 2.9%.
"Our assessment is that developments since the June MPS will have knocked about half a per cent off the RBNZ's interest rate projections," Westpac said. "That's a relatively large change in the space of three months - but a peak OCR of around 5.25% is still a far cry from the 4% peak that interest rate markets are currently pricing."
The RBNZ has raised interest rates twice this year to bring the overnight cash rate to 3% from 2.5%. Rates had been held at 2.5% since a 50-basis point reduction to that level in April 2009.
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