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Bollard holds rates, but still talks tough

Jenny Ruth

Thursday 28th July 2005

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Jenny Ruth

As expected, Reserve Bank governor Alan Bollard left interest rates unchanged but kept his tone hawkish, highlighting his expectation that annual inflation will rise above his 3% target in coming quarters and that there's no prospect of rates falling in the foreseeable future.

The official cash rate (OCR) remains at 6.75%.

Bollard says he needs to maintain a firm policy stance so that short-term inflation pressures don't become entrenched.

"A further tightening of policy could not be ruled out in the event of a resurgence in medium-term inflation pressures."

Cameron Bagrie, an economist at ANZ/National Bank, says the statement didn't contain any surprises although the wholesale interest rates market has interpreted it as mildly dovish, pushing rates down a couple of basis points. "I don't think that was the intent.

The governor has acknowledged the easing in economic activity, as we would expect, but has retained his hawkish tone.

It's very much a steady as she goes statement." Bollard noted that the economy has slowed over recent quarters, particularly sectors such as manufacturing which are exposed to the high New Zealand dollar. It also appears that household consumption is beginning to weaken, although the housing market remains strong.

Darren Gibbs, an economist at Deutsche Bank, says the risk of a further rate hike is still in prospect but, to some people, the fact that Bollard held the OCR steady was enough of a positive in itself.

But when Bollard said there's no prospect of an easing, he didn't mean just for the next couple of months, but for a year at least, Gibbs says.

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