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Bollard leaves rates unchanged but talks tough

By Jenny Ruth

Thursday 9th June 2005

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 Jenny Ruth
As expected Reserve Bank governor Alan Bollard left his benchmark official cash rate (OCR) unchanged but warned of upside inflation risks and that there is no scope for easing interest rates in the foreseeable future.

"Dr Bollard basically followed the script. He delivered a statement on the hawkish side of the spectrum," says Sean Comber, an economist at ANZ/National Bank.

If it hadn't been for weaker data over the last month, Bollard could have raised rates and he still might if there's any strong data over the next couple of months, he says.

The key message Bollard was trying to convey is that interest rates aren't going down any time soon, despite market expectations that they will either in the December or March quarters, Comber says.

With the interest rate futures market virtually unchanged from before the monetary policy statement was released, it seems the market remains sceptical about Bollard's message.

"The market's digesting it at this stage. The market tends to focus most on the data that's come out most recently rather then taking a bigger picture view."

Nick Tuffley, an economist at Westpac, says the Reserve Bank's forecasts imply a further OCR hike.

"There's a big difference between how most economic commentators have interpreted recent data and how the Reserve Bank has interpreted it," Tuffley says.

"The market's likely to remain a bit sceptical about the chances of another rate hike unless there's some shocking piece of data." It had been expecting a hawkish tone to today's statement anyway.

In particular, Tuffley is sceptical about the central bank's assessment that inflation pressures have increased slightly.

"We don't really believe that, but nevertheless, they're the ones with the finger on the button."

But in the meantime, there's little risk of mortgage rates going up and fixed rate mortgages may continue to fall a little.

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