Bollard says long-term rates 'out of line', kiwi dollar tumbles

Wednesday 1st April 2009

Reserve Bank Governor Alan Bollard said the rise in long-term interest rates is "out of line" with the bank's expectations, given any recovery in economic growth is likely to be gradual.

The New Zealand dollar tumbled about one US cent after the statement, with traders initially saying Bollard was attempting to jaw-bone rates lower. The kiwi was recently at 55.89 US cents from 57.05 cents immediately before Bollard's statement.

"As we said in our 12 March Monetary Policy Statement, the economic recovery is expected to be very gradual," Bollard said. "Furthermore, the risks around the outlook continue to be weighted to the downside."

"In these circumstances we believe the rise in longer-term interest rates is unwarranted and inconsistent with the monetary policy outlook," he said. "We are projecting interest rates to remain at relatively low levels for an extended period."

"If this apparent distortion persists, it could put unnecessary pressure on the cost of borrowing by firms and households," he said.

By Jonathan Underhill

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