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Bollard's "Dr No Change" reputation goes untarnished


Wednesday 20th November 2002

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Reserve Bank Governor Alan Bollard played his cards fairly close to his chest today in his first Monetary Policy Statement (MPS) since taking the top job in September.

The former Treasury secretary is fast gaining a reputation as something of a "Dr No Change" after he elected to leave New Zealand's official interest rate at 5.75 percent for the second time running.

He also flagged his intention to maintain a neutral bias in the coming months, as the uncertain global outlook moderates local inflation pressures.

"In essence, strong domestic demand is expected to be offset by offshore developments, keeping inflation pressures in check," Dr Bollard said.

"The bank's projections show no change in short-term interest rates over the period ahead."

The move marks a change from former governor-turned National MP Don Brash's hawkish approach of hosing down inflation with a rate hike at the first sign the economy was getting a head of steam.

It is also a sign that Dr Bollard is taking the Policy Targets Agreement (PTA) he signed with the Government in September to heart.

The PTA requires the Reserve Bank to target inflation outcomes of "1 percent to 3 percent on average over the medium term", rather than the previous target of the mid point of a 0 percent-3 percent band.

Dr Bollard said the new agreement gave the bank more flexibility, allowing it to look through short term inflation blips and turn its attention to the outlook for inflation over a period of three or more years.

"Our goal in (cutting or raising interest rates) will be to ensure that, in the absence of significant unforeseen events, inflation will be back within the target range in the latter half of that three year period," he said.

The "easy does it" approach was widely expected by economists, with forecasters polled by Reuters unanimous the cash rate would stay put.

"The fact that they appear to be saying `no change' for the foreseeable future, that's fair because you can go down either scenario as to whether you think things get that much worse on the global scene to require easing, or the domestic economy wins over and you have to tighten," UBS Warburg chief economist Robin Clements said.

"Most of us in the market have got no change at least until March, some a lot longer than that."

Interest rates have been on hold since July, and Reserve Bank forecasts today showed the benchmark 90-day bill rate -- from which banks fund their mortgages -- is expected to stay at 6 percent until the end of 2004.

Economists did detect a slightly aggressive tone to today's statement, however.

"While some analysts anticipated a more dovish leaning, we identified a lingering `ghost of Brash' hawkish element via exhausted capacity from stronger domestic demand," Salomon Smith Barney economist Annette Beacher said.

That tone initially helped send the New Zealand dollar higher against the US and Australian dollars, although it backtracked later in the day.

The kiwi firmed to US49.75c immediately after the announcement, from US49.68c. Against the Australian dollar it rose half a cent to A89.05c -- its highest level in four years.

By 5pm the local unit eased to US49.46c and A89.69c.

Bank of New Zealand chief dealer Mike Symonds said New Zealand was in an enviable position compared with most countries with the economy still growing and the Reserve Bank with plenty of ammunition to move rates if needed, unlike the US and Japan.

The Reserve Bank expects the New Zealand economy to grow by 4.25 percent in the year to March 2003, before easing to 2.5 percent in 2004 and 2005 in response to international market conditions and a moderating of the demand pressures linked to strong migration.

Inflation is seen at 2.25 percent in the March 2003 year, 2 percent in March 2004 and 2.25 percent in 2005.

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