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Bollard leaves rates unchanged

By Jenny Ruth

Thursday 27th July 2006

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 Jenny Ruth
Reserve Bank governor Alan Bollard has confirmed expectations that he would leave interest rates unchanged and, while he is ruling out the likelihood of a rate cut for "some time," he also doesn't expect to have to raise rates further.

Bollard left his official cash rate (OCR) unchanged at 7.25%, noting that although economic activity has been a little stronger than expected and short-term inflation pressure has increased, recent economic developments have been broadly in line with the central bank's expectations.

Cameron Bagrie, chief economist at ANZ National Bank, says the market had been looking for an extremely hawkish statement. "It was hawkish, but not as much as the market expected," he says. That had prompted a decline in wholesale interest rates and the currency was sold off a little.

Robin Clements, an economist at UBS New Zealand, says the wholesale market had been concerned about the possibility of a rate hike, pricing in about a 50% chance of one at one stage last week.

"The basis was that the Reserve Bank would leave the door open to an OCR rise. They've poured cold water on that," Clements says.

"They seem to be pretty confident they've done enough and they've just got to wait for the inflation blip to pass," he says.

Dean Ford, an economist at Bank of New Zealand, says that although the market had been spooked by data such as that showing inflation at 4%, well outside the Reserve Bank's zero to 3% target over the medium term, the data hasn't been all that far from the central bank's forecasts.

"The one thing they did acknowledge was that short-term inflation pressure has ticked up and they think it's going to stay high as well for the next few quarters," Ford says. "But they also say it's largely due to higher oil prices."

The Reserve Bank has held its forecast that inflation will return within its target by the end of 2007. "What they're saying is that this is just a short-term blip in inflation" so it doesn't need to react, Ford says.

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