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Bollard holds rates steady but a March hike looks certain

-Jenny Ruth

Thursday 25th January 2007

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Jenny Ruth
Although Reserve Bank governor Alan Bollard left interest rates unchanged, as expected, his hawkish tone makes it seem almost certain he will raise rates in March.

Bollard left the official cash rate (OCR) unchanged at 7.25% where it has remained since December 2005 but pointed to retail sales rebounding, a "resurgent" housing market and strong recoveries in business and consumer confidence as reasons for concern.

Brendan O'Donovan, chief economist at Westpac, says that previously Bollard has referred to the central bank's risk assessment "suggested" firmer monetary policy may be necessary but now he's using the term "likely."

"That ups the ante for a hike in March," O'Donovan says.

Although wholesale interest rates remained little changed after Bollard's statement, the New Zealand dollar gained about half a US cent, back to 70 US cents within half an hour of its release.

Stephen Toplis, an economist at Bank of New Zealand, says Bollard talks about needing clear indications of a moderation in housing and domestic demand. "We already know neither of those things are happening. Do you need to be an economic analyst to work that out," Toplis says.

"He's done everything but tighten monetary policy. He's told us he's going to raise rates in March which begs the question why doesn't he do it now."

But Cameron Bagrie, chief economist at ANZ/National Bank, says there's still some uncertainty as to whether the upswing in consumer spending and the housing market is going to be sustained so it's appropriate for Bollard to wait a little longer.

"The ball really is in the New Zealand household sector's court." If people keep spending and the housing market remains so strong, "they're going to hit us again. (But) my judgement at the moment is that I don't think it's going to be sustained," Bagrie says.

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