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Bollard holds OCR at 2.5%, flags rate hike 'over the coming months'

Thursday 29th April 2010

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Reserve Bank of New Zealand Governor Alan Bollard held the official cash rate at a record low 2.5% today, and indicated rate hikes were in now sight with the economy’s recovery on track.  

“We continue to expect the New Zealand economy to recover in line with or slightly faster than our March statement projection,” Bollard said in a statement in Wellington today.

 “We expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.” 

Bollard has kept the OCR at a record low for 12 months after he slashed interest rates to revive the economy from its worst recession in 18 years.

The Reserve Bank forecasts the 90-day bank will rise to 3.3% in the September quarter, and traders have been split over whether Bollard will tighten monetary policy in June or July after first-quarter inflation came in at 0.4%, below market expectations.  

“Broadly, the message will be the economy tracked as expected and the RBNZ sees sufficient evidence of a recovery to carry out its plan for normalisation,” said Imre Speizer, markets strategist at Westpac Banking Corp. before the announcement.

“Any meeting after this one could result in a rate hike.” The kiwi dollar fell to 71.77 U.S. cents from 72.07 U.S. cents immediately before the statement as Bollard said interest rates may not have to rise as far as in previous tightening cycles.

New Zealand’s economy climbed out of recession in the middle of last year as returning expatriates and incoming migrants stoked demand for housing amid a decline in new construction, while dairy prices bounced back from a slump in July and have underpinned confidence in the farming sector. 

Bollard said the country’s strong export earnings supported its faster-than-expected recovery, and was something he persistently said was necessary for sustainable economic growth last year. 

“Trading partner activity has recovered more quickly than we expected,” he said. “Consistent with this, export commodity prices have increased close to their 2008 peak.” 

Still, consumers are continuing to look to the future as a 10-year high unemployment rate of 7.3% continues to sap their appetite to start buying big ticket items.

The ANZ Roy Morgan Consumer Confidence survey last week showed consumers are more optimistic about the future than they are about the present, and Bollard said households were still “cautious” amid a subdued housing market and credit growth in today’s statement. 

Interest rates won’t go up as far as they have in the past, with the wedge between lending rates and the OCR and a steeply positive interest rate curve making hikes more effective than in the past, Bollard said.

He has previously flagged the core funding ratio for banks, which requires 65% of licensed lenders’ funding to come from domestic or short-term wholesale sources, as damping the need for excessive rate hikes.  

The central bank expects inflation to stay within its target band of between 1% and 3% in the medium term, though today’s increase in tobacco excise tax put more upwards pressure on the consumer price index, adding 0.2 percentage points in the second quarter, according to ANZ New Zealand economists. 

The latest National Bank Business Outlook, out yesterday, showed confidence has stayed buoyant after its rebound through the latter half of 2009, and companies are beginning to get more optimistic about their hiring and investment intentions.

Bollard flagged weak business spending and deleveraging as signs that there was room for the recovery to pick up pace.  

Though businesses’ pricing intentions remained stable at a net 26% of respondents expecting to increase their prices over the coming year, expectations for inflation edged up to 2.67% from 2.64% in March as companies prepare for Bollard to begin tightening monetary policy.  

That will bring New Zealand into line with its biggest trading partner across the Tasman which has been on a tightening regime since October last year.

The Reserve Bank of Australia has hiked its target cash rate four times, and yesterday’s data showing a faster than expected pace of inflation increased the prospect of another rate hike by the RBA next month.

At 4.25%, the Australian benchmark rate is currently 175 basis points over New Zealand’s OCR, a record spread in Australia’s favour. 

Meanwhile, the world’s largest economy is still in damage control, with the Federal Open Market Committee keeping the Fed Fund at a target of between zero and 0.25%.

While it reiterated rates will remain low for an extended period, it was more upbeat on America’s housing and labour markets.

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