NZ dollar gains after Bollard says he's in sync with markets over rate hike timing

Thursday 6th May 2010

New Zealand’s dollar climbed back over 72 US cents after Reserve Bank Governor Alan Bollard said he is broadly in sync with markets over the likely mid-year timing of the first hike in interest rates.

“Financial markets currently expect the Reserve Bank to begin raising the official cash rate around the middle of the year and continue to do so in small steps for some time,” Bollard said in a speech to a Local Government meeting in Dunedin.

“This is broadly in line with our current views as outlined at last week’s OCR review.”

Bollard surprised some investors with his statement last week, which flagged a gentler resumption of tightening monetary policy, given the still fragile state of business and household finances.

In notes for today’s speech he said businesses are behaving “very cautiously” and holding off on investments and hiring, while households faced only a soft pick-up in house prices and are repaying debt and building up savings rather than borrowing more.

He said banks are still being “extraordinarily restrained” in extending credit and he would like to see lenders prepared to lend “for all sound business ventures.”

Business credit growth is contracting at a pace of 8%, “a most unusual situation,” he said.

The New Zealand dollar recently traded at 72.07 US cents from 71.79 cents immediately before Bollard’s speech notes were released.

It climbed further to 72.42 cents after figures showed the unemployment rate tumbled to 6% in the first quarter. The kiwi rose to 79.74 Australian cents from 79.18 cents.

Bollard said determining a ‘neutral’ level for the official cash rate can only be decided over time.

With the OCR currently at “very stimulative” levels at a record low 2.5%, monetary tightening will initially have the effect of "taking the foot off the accelerator."

“We do not expect to have to touch the brake pedal for some time.”

The export, or tradable sector has improved as a result of stronger exports and a softening of imports. The rebalancing has been helped by high prices for New Zealand’s dairy, beef, forestry and aluminium exports, tempered only by the offset of a relatively strong kiwi dollar, he said.

Businesswire.co.nz

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