Reserve Bank leaves interest rates unchanged

By Jenny Ruth

Thursday 27th January 2005

As expected, Reserve Bank governor Alan Bollard has left interest rates unchanged, although the wording of his statement wasn't as hawkish as had been expected.

Bollard says the six rate increases last year and the rise in the New Zealand dollar should constrain the economy sufficiently, although there is still a risk that a further rate hike may be necessary. He also says there's little scope for an easing in interest rates in the foreseeable future.

"At the margin, it's not as hawkish as the market was set for," says Cameron Bagrie, an economist at ANZ Bank.

That was reflected in the New Zealand dollar dropping between 0.35 and 0.4 US cents and the 90-day bill futures from March through to December dropping about six basis points.

Brendan O'Donovan, chief economist at Westpac, says a little over a month ago the market was pricing in a small possibility of the next move being a cut in interest rates. "Prior to today's statement, they had been pricing in a 40% change of an interest rate hike in the next few months. The message being completely consistent with December's will allay some of the market fears that were building," he says.

The central bank reiterated that economic activity was at least as strong as expected, that inflation is now near the top of its zero to 3% target and that the labour market remains tight. Inflation in 2004 was 2.7%, a two-year high.

"There was no scope for misinterpretation of this statement," O'Donovan says.

Stephen Toplis, an economist at Bank of New Zealand, says the December statement had "opened the door to the possibility of a further rate increase. That door has been well and truly left wide open."

Toplis rates the chances of another rate hike in the first half of this year at slightly less than 50%.

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