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Reserve Bank leaves OCR unchanged and rules out any easing this year

By Jenny Ruth

Thursday 9th March 2006

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 Jenny Ruth
Reserve Bank governor Alan Bollard produced few surprises in leaving interest rates unchanged and firmly ruling out any easy this year.

He highlighted the fact that although the buoyant housing market is showing signs of cooling, he needs to see it continuing to slow to help ease inflation pressures.

Bollard left the official cash rate unchanged at 7.25% as everyone expected and wholesale interest rate markets barely moved.

However, the markets are still pricing in two rate cuts before the end of the year.

Craig Ebert, an economist at Bank of New Zealand, says the market expected Bollard to rule out an easing any time soon for fear of sparking a rally.

"There's a sense that the Reserve Bank is trying to play chicken with the market."

However, the market might need to adjust its thinking.

Ebert says he thinks the central bank's view shown in its forecasts that the easing won't start until towards the end of next year is a legitimate one.

But most of the data is now showing that the economy is slowing. "It's becoming a lot more general, it's becoming a lot more obvious."

For here on, the risks are greater that the data will surprise on the downside than that it will be more robust than expected, he says.

Anthony Byett, chief economist at ASB Bank, also thinks the market might be jumping the gun a little, although he says it's comforting that Bollard has confirmed that he is unlikely to need to raise interest rates again in the current cycle.

The Reserve Bank is "suggesting that eventually rates will decline, but not this year. That's good news for most people."

The general public shouldn't expect much change in interest rates from current levels for the rest of this year but can look forward to lower rates next year, he says.

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