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Bollard keeps OCR at 2.5%, says any increase to be "over year or so" as global turmoil weighed

Thursday 15th September 2011

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Reserve Bank Governor Alan Bollard kept the official cash rate at 2.5%, as expected, saying any increases would be ‘over the coming year or so’ as he evaluates the impact of turmoil in the global economy.

“If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase,” Bollard told reporters in Wellington. The fall-out from the U.S. credit rating cut and Europe’s ongoing sovereign debt crisis has dented market sentiment, and if conditions don’t improve, “New Zealand bank funding costs will increase” without hikes in the OCR, he said.

The central bank’s monetary policy statement said any future rate hikes would be “over the coming year or so,” though it flagged increased bank funding costs and reduced export demand as threats to an increase in rates.

The Reserve Bank reined in its forecast for the 90-day bank bill through 2012 and 2013, with the rate settling at 4.3% in the December quarter next year where previously it was seen climbing to 4.9% by the end of 2013 in the June forecast. The rate is often seen as a proxy for the track of the OCR.

At the last OCR review, Bollard indicated he wanted to remove the emergency stimulus from his 50 basis point cut in response the February earthquake, saying there was little need for it to stay in place as New Zealand’s economic recovery took hold. Since then Europe’s sovereign debt crisis and the prospect of a faltering U.S. economy sent financial markets into turmoil and have stayed the Governor’s hand.

“It would be a brave central bank to hike in this environment, when virtually every other central bank is pushing out (some by years) the timing for hikes,” Robin Clements, economist at UBS, said in a note before the announcement. “However, the downside risks to global growth will mean that the RBNZ is expected to judge it prudent to stay on the sidelines for the time being.”

The central bank said market pricing for OCR hikes over the coming six months is “broadly unchanged” compared to the June statement, though the pace of further hikes has been pared back. Traders were betting Bollard will lift the OCR by 48 basis points in the coming 12 months, according to the Overnight Index Swap curve.

Bollard said the “high level of the New Zealand dollar is having a dampening influence on some parts of the tradeable sector and on imported inflation” and added to the tightening on the economy.

The bank lifted its forecast track for the currency on a trade-weighted basis to peak at an annual average 71.60 in the 12 months ended March 31 next year. That’s up from 68.60 in its June projection. The kiwi topped 88 U.S. cents in a post-float at the start of August, and has stayed in the 80s since then.

Still, Bollard was more upbeat about the domestic economy’s strength, saying activity surprised on the upside and capacity usage looks to have increased. That was filtering into households, which have become more confidence about spending, and helped stoke the housing market, which languished through most of last year.

The bank expects the economy to grow 2.8% in the March 2012 year, up from 2.5% in the June forecast, with slower growth in 2013 of 3.1%, compared to 4.6%. The bank said the slower pace of expansion was due to the delays in the Christchurch rebuild as aftershocks put of construction. The bank lifted its forecast cost for the Canterbury earthquakes to $20 billion.

Stronger than expected growth in the first three months of the year and tightening capacity has stoked concerns over inflationary pressures, and the consumer price index rose 1% in the second quarter, for an annual pace of 5.3%.

Bollard said underlying inflation is rising, but is estimated to be near 2%, the mid-point of the bank’s target band of between 1% and 3%.

The central bank expects the annual pace of headline inflation, which includes the government’s hike in GST last year, peaked in the June quarter at 5.3%, and is picking that to slow to 4.9% in the September period.

(BusinessDesk)

BusinessDesk.co.nz



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