Sharechat Logo

Bollard raises rates but talks less tough than expected

By Jenny Ruth

Thursday 8th December 2005

Text too small?
 Jenny Ruth
As expected, Reserve Bank governor Alan Bollard has raised interest rates again, although the market is interpreting his comments and economic projections as less hawkish than expected.

Bollard raised his official cash rate (OCR) from 7% to 7.25%. Reflecting perceptions that Bollard's comments are relatively dovish, the March 90-day bank bill futures rallied from an implied 7.63% yield before the statement to 7.57% and the June futures rallied 8 basis points to 7.45%.

Perhaps the biggest reaction was in the currency which had already been under pressure, sinking from 71.75 US cents at midday yesterday to 70.15 cents after the statement.

Bollard says whether further rate increases are needed will depend on the extend to which demand pressures moderate and he again singled out the housing market as a major problem. Both mortgage credit and house prices have continued growing longer than expected, he says.

Tony Alexander, chief economist at Bank of New Zealand, says Bollard's warning about the likelihood of further rate increase wasn't as strong as the markets were expecting.

"He sounded a bit conciliatory in the statement. In the last rate review, the Reserve Bank basically said, we will raise rates unless we get weak data. Now they're implying, we might not have to increase rates further," Alexander says.

"We think the Reserve Bank is probably a bit scared of the hard landing scenario."

Nick Tuffley, an economist at Westpac, says the underlying forecasts in today's monetary policy statement suggest "they've got a little lea-way to sit back and wait - it's going to be heavily data dependent. Housing and the upcoming GDP data figures are going to be key."

What has changed in today's statement is that the central bank is acknowledging the risks that the economy could slow faster than expected.

Robin Clements, an economist at UBS New Zealand, says today's rate rise could be the last in the current cycle. "If things err on the soft side, which they ought to do, we should see the end of the cycle."

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.
IRG See IRG research reports