Bollard leaves rates unchanged but talks tough

By Jenny Ruth

Thursday 14th September 2006

Although Reserve Bank governor Alan Bollard left interest rates unchanged, as expected, he's again talking tough and opened the door to the possibility of a further rate hike.

Bollard's official cash rate (OCR) is unchanged at 7.25% but he says the inflation outlook and the stronger than expected economy means "we are less confident that no further policy tightening will be required in this cycle."

The central bank isn't expecting inflation, currently at 4%, to fall back below 3%, the top end of its target, until late 2007.

Brendan O'Donovan, chief economist at Westpac, says wholesale interest rates rose 6 or 7 basis points and the currency 0.76 points on a trade-weighted basis in reaction to the statement.

New Zealand's relatively high interest rates have been driving the currency higher recently and, by talking about the risks of another rate hike, Bollard "is effectively giving the currency wings," O'Donovan says.

His view is that recent data has been mixed but "in the scheme of things, it hasn't been materially stronger." However, the very strong employment data and the resilience of the housing sector "seems to have spooked him."

The unemployment rate in June fell back to the 3.6% historical low while the median national house sale price in July was up nearly 11% on a year earlier.

Anthony Byett, chief economist at ASB Bank, says that after saying in July that he didn't expect to have to raise rates again in the current cycle, Bollard has reverted to a more conservative stance. However, Byett doesn't think Bollard will actually raise rates.

He agrees that the economy has been stronger than expected on average. "It would appear that we've bounced back from the very slow patch we hit late last year."

The slower economy that Bollard needs to see "is very much contingent on a slowdown in the housing market and the household sector." If that doesn't happen, Bollard will put rates up again, Byett says.

"One way or other, the household sector is going to feel the pinch."

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