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Bollard keeps interest rates on hold

By Jenny Ruth

Thursday 27th January 2011

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 Jenny Ruth

Home-owners can be confident floating mortgage rates won't be rising for some time following Reserve Bank governor Alan Bollard's expected decision to keep interest rates on hold.

Bollard kept his official cash rate (OCR) steady at 3% and said "it seems prudent" to keep it there "until the recovery becomes more robust." However, Bollard maintained his tightening stance, saying the OCR is likely to rise "modestly" over the next two years.

Bollard did acknowledge economic data through the second half of 2010 was weaker than expected but said forward indicators are more promising.

"They (the Reserve Bank) were focusing on the positives rather than pointing out the downside risks," says Chris Tennent-Brown, Commonwealth Bank of Australia's New Zealand economist.

"They will be on hold for several more meetings and eventually hiking later this year."

Doug Steel at Bank of New Zealand says the local dollar had been pushed down ahead of the statement for fear of the statement being more dovish than it turned out to be and the currency jumped from about 76.55 US cents before the statement to more than 77 cents afterwards, but that was still within its recent trading range.

"Going in to it, there was a risk they might give a little ground from their December forecasts on the back of the weaker data we've seen, but they've held firm," Steel says.

Among the positives such as higher commodity prices and improving business confidence, Bollard said "there are tentative signs that housing market activity has stabilised after having trended lower for some months.

Darren Gibbs at Deutsche Bank says while we've had two months of improving house sales since the particularly weak October figures but the housing market is still very weak.

"Housing is thrown in there because it's a big one that everyone knows they focus on," Gibbs says. "If you look on a chart, it's (the improvement) still barely perceptible but at least it means it's not going lower."

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