Bollard holds rates steady but hawkishness exceeds expectations

-Jenny Ruth

Thursday 7th December 2006

Reserve Bank governor Alan Bollard met expectations by keeping official interest rates unchanged and by talking tough but still managed to surprise wholesale interest rate and currency markets with his forecasts.

He left the OCR unchanged at 7.25% but has raised his forecast of where 90 day bank bills are heading by about 20 basis points which is also about 20 points higher than they were before the statement.

"It looks like they've factored in a hike without saying so. How are they going to get there without a hike," says Robin Clements, an economist at UBS New Zealand.

The New Zealand dollar shot up about half a US cent to 68.70 cents - it was down near 60 cents in July - and wholesale interest rates were up between seven and 10 basis points within half an hour of the statement and both looked to be heading higher.

Brendan O'Donovan, chief economist at Westpac, says that while Bollard acknowledged a number of positive developments, particularly a better near-term inflation outlook - he says annual inflation could be as low as 2% next year - his focus remains on the buoyant housing market and resilient household consumption.

"Although there are strong elements on both sides of the ledger, what they're most concerned about is the rebound in housing and the resilience in household spending," O'Donovan says.

Bollard said the housing market "could continue to defy predictions of a downturn" and that domestic demand could also be further stimulated by increased government spending.

Clements says the central bank did acknowledge that many exporters are feeling the pressure.

"Many exporters are feeling pressure from the high exchange rate which, if sustained, could threaten the ongoing rebalancing of the economy," Bollard said.

Clements says he's been hearing some horror stories from exporters who hadn't been carrying any hedging because all the experts were telling them the currency was going to fall further.

"If they do hike, the only people they're going to hurt is exporters," Clements says.

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