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Bollard leaves rates unchanged and rules out an easing

By Jenny Ruth

Thursday 26th January 2006

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 Jenny Ruth
Reserve Bank governor Alan Bollard has left interest rates unchanged, as expected, but is ruling out any prospect of interest rates falling.

Bollard says he doesn't expect to have to raise his official cash rate (OCR), currently at 7.25%, further in the current cycle but that he can't rule an increase out "until we see clear evidence of a sustained weakening in domestic demand." While he can see some early indications, "we are yet to see hard evidence of a sustained slowdown in domestic demand."

Reaction to the statement varied considerably.

"We think it's one of the best statements from the bank in a long time. It states the case pretty clearly. It's unequivocal," says Craig Ebert, an economist at Bank of New Zealand.

No further rate hikes are dependent on the central bank seeing a sustained weakening in domestic demand. "If they don't see that evidence, it may well regenerate the case for a further rate hike," Ebert says.

At the other end of the spectrum, Westpac chief economist Brendan O'Donovan reckons the Reserve Bank "has got its head in the sand."

Despite Bollard's ruling out a rate cut any time soon, O'Donovan is expecting a cut in the September quarter, although if the currency doesn't fall, it could be as soon as April but more likely in June.

"Monetary conditions are far, far too tight in this economy, the combined effect of the currency and interest rates. In an ideal world, the Reserve Bank would like to see interest rates stay high until the housing market cools and the consumer is dead," he says.

Bollard missed an opportunity to say that while he doesn't want rates to drop, he wouldn't stand in the way of the currency falling, O'Donovan says.

The New Zealand dollar gained about 30 points to 68.76 US cents after the statement but there was little change in wholesale interest rate markets.

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