OCR rises but Bollard surprisingly dovish

Thursday 28th October 2004

While Reserve Bank governor Alan Bollard raised interest rates this morning, as everyone expected, he surprised the market with his surprisingly dovish rhetoric.

Bollard raised the official cash rate (OCR), which directly affect floating mortgage rates, from 6.25% to 6.5%.

But he said that current monetary policy settings "are now doing enough to ensure price stability." Some economists had expected an outside chance that the OCR would go to 6.75% today and many had been thinking there was a very good chance of it going to that level in December.

The currency markets reacted immediately, pushing the New Zealand dollar down half a US cent to 68.90 US cents. The reaction in wholesale interest rate markets was more subdued with the 90-day bank bills little changed while the December 90-day bank bill futures slipped from implying the physical bills will be at 6.83% in December to 6.75% by then.

Craig Ebert, an economist at Bank of New Zealand, says that he now rates the chance of a rate hike in December at just 20%, down from 50% before today's move. "At the margin, it's a bit more dovish than we had expected," he says.

Bollard said that while the economy is still very strong and the economic data surprising on the upside, the previous OCR hikes this year have still to work their way through the economy and that the high New Zealand dollar will also help to cool activity. Changes in monetary policy generally take up to 18 months to affect an economy and Bollard has raised the OCR from 5% in January.

Nick Tuffley, an economist at Westpac, says Bollard's statement contrasts significantly with his last one in September when he was talking about their being very little headroom left and the likelihood of inflation above 3% for 18 months. Bollard is pledged to keep inflation between zero and 3% over the medium term.

Today's statement was surprisingly short. "It's more noteable for what's not in it that for what is," Tuffley says.

Anthony Byett, chief economist at ASB Bank, says the statement is still broadly in line with market expectations and doesn't rule out a further rate rise in December.

"It's non-commital. Any likely move becomes a day-to-day proposition now. We really just need to wait and see what evolves over the next few weeks."

The Reserve Bank's next monetary policy statement is due on December 9.

Comments from our readers

No comments yet