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Future rate cuts unlikely

By Jenny Ruth

Thursday 4th September 2003

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 Jenny Ruth
Reserve Bank governor Alan Bollard confirmed expectations by leaving his official cash rate (OCR) unchanged at 5%, highlighting concerns about the buoyant housing market and house price inflation.

In his latest monetary policy statement, Bollard also noted that while the economy is cooling, that isn't happening as sharply as previously expected, although exports are still under pressure due to the rising New Zealand dollar and sluggish global recovery.

Economists are interpreting the statement as signalling that a further rate cut this year is unlikely, although that hasn't been completely ruled out, and that rates could rise again from the middle of next year.

"Today's statement was slightly on the tighter side of neutral," says Brendan O'Donovan, chief economist at Westpac Bank who had been among those thinking a further cut might be in the wings.

That was on the basis that the New Zealand dollar would keep rising, inflicting more damage on exporters.

Today's statement suggests the currency would have to rise further than previously thought before the central bank considered a further rate cut necessary, O'Donovan says. "They've effectively raised the bar."

While the state of the housing market is a valid concern for the Reserve Bank - he estimates house prices are about 9% over-valued - the central bank's short-term inflation forecasts are too high, he says.

Although there's a strong speculative element in the housing market, "it's the only source of inflation pressures in the economy."

Deutsche Bank, previously among the most aggressive in forecasting rate cuts, changed its view today from expecting a further cut to the OCR remaining unchanged for the next 12 months.

Anthony Byett, chief economist at ASB Bank, says today's statement sent "a reasonably clear message" all but ruling out further rate cuts and that the question now is whether rates will have to rise again next year. The central bank's assumptions, which aren't necessarily forecasts, are that the OCR will rise from the middle of next year.

John McDermott, chief economist at National Bank, says the statement "altered the balance of risks" away from the downside risks to the economy. He sees short-term interest rates remaining more or less where they are until the second half of next year while longer-term rates will probably rise on the back of a global economy.

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