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New broom Bollard watches his steps in first MPS


Friday 22nd November 2002

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Is he a peacemaker or a bird of prey?

Reserve Bank (RB) Governor Alan Bollard kept the masses wondering this week, serving up a pretty neutral forecast in his first Monetary Policy Statement since assuming the role of New Zealand's top money man in September.

The chary statement left forecasters to interpret in their own way the widely expected decision to leave the country's Official Cash Rate (OCR) -- the benchmark for mortgages and business lending -- at 5.75 percent.

In the currency market, the kiwi dollar today raced to a 21-month high against the US dollar and a four-year high against the Australian dollar as investors detected a "ghost of Brash"-like hawkish tone in the statement that could mean the yawning yield differential between New Zealand and its trading partners is here to stay.

"That certainly added a bid tone to the market where people had been expecting something more on the dovish side than they got," Westpac chief dealer in New Zealand Basil Payn said.

"It's reinforced the interest rate differential and that our monetary policy is significantly tighter than most other countries in the world."

Because equity markets were so uncertain, offshore investors found New Zealand's interest rates highly attractive.

"A lot of them can't believe our interest rates -- it's just too good to be true," Mr Payn said.

The United States federal funds rate is currently 1.25 percent, while Australia's key cash rate is a full percentage point lower at 4.75 percent.

The Kiwi hit a peak of US50.45c last night and dealers expected it to test US51c in the coming days.

Against the Australian dollar, the kiwi flew to A89.56c. It was last up at this level in December 1998.

While overseas trips may be cheaper, exporters will feel even more pain. The New Zealand dollar has soared 21 percent this year against the greenback and 10 percent against the aussie, and many farmers are also having to cope with lower world prices as well.

Bank of New Zealand chief dealer Mike Symonds said New Zealand was in an enviable position compared with most countries, with the economy still growing and the RB with plenty of ammunition to move rates if needed, unlike the US and Japan.

The RB expects the local economy to grow by 4.25 percent in the year to March 2003, before easing to 2.5 percent in 2004 and 2005 in response to international market conditions and a moderating of the demand pressures created by strong migration.

But despite the market optimism, Dr Bollard is only modestly bullish about the kiwi's prospects of a further rise.

"We have got into our forecasts a projection that a medium term real trade-weighted index (TWI) equilibrium level for the kiwi is roughly 58, which is roughly US52c," he told NZPA in an interview.

"We are already a bit higher than when we started the forecasts so if you look at our predictions, you've got as a working upside another one or two cents."

Interest rates have been on hold since July, and RB forecasts show the benchmark 90-day bill rate -- from which banks fund their mortgages -- is assumed at 6 percent until the end of 2004.

That has economists predicting no change in the OCR until at least March next year and possibly a lot longer than that.

"New Zealand looks to be very well placed as we head into 2003," National Bank economist Cameron Bagrie said.

"It looks like the RB is going to be in a holding pattern until global weakness starts to manifest itself in domestic indicators."

From a performance point of view, the Bollard stage show could be honed a little.

There may be no sexy way of delivering a "no change" announcement on interest rates, but Dr Bollard's very measured approach made inflation hawk-turned National MP Don Brash seem like a real mover and shaker.

In his defence, Dr Bollard is master of a very different era. New Zealand is no longer in the grips of double-digit inflation of the sort that required drastic action in the early days of Brash's rein.

The inflation dragon is now a more benign beast -- bank forecasts have it weighing in at about 2.6 percent in the December quarter.

But there's something very bureaucratish about the way Dr Bollard, who was Treasury secretary before jumping into the RB hotseat, quotes the new Policy Targets Agreement (PTA) -- signed between him and the Government -- at every opportunity.

Dr Bollard seems to have taken to heart the agreement, which changed the bank's inflation target from a 0-3 percent to a 1-3 percent target band "on average over the medium term".

He appears quite prepared to let inflation balloon to the upper end or even above that band for periods of up to three years.

He will be aided by the soaring dollar, which will see import prices drop and has already resulting in three cuts to petrol prices in the last fortnight.

"Our goal in (cutting or raising interest rates) will be to ensure that, in the absence of unforeseen events, inflation will be back within the target range in the latter half of that three year period," Dr Bollard said.

That makes him the antithesis of Dr Brash, who blithely ignored government attempts to make him adopt a more flexible stance -- never wavering from his original mantra that "a stable price level is the only enduring contribution monetary policy can make to our economic well-being".

Now National's finance spokesman, Dr Brash criticised the new PTA for meaning inflation will likely average between 2 percent and 2.5 percent, adding that it was "pretty hard to argue" that amounted to price stability.

By his own admission, Dr Bollard is still finding his footing in the new role.

"I've got a lot to learn about the features of monetary policy and all the other functions of the bank so I'm going to be on a hard learning phase for the next year," he told NZPA.

"I'll enjoy it even more when I've learnt properly all the parts.

"It's like any new job, except in this one people are staring at you," the bespectacled 51-year-old said sheepishly. He might have added that mistakes are likely to cost people their jobs.

Dr Bollard is set to give his first public speech on monetary policy on Monday, but it seems there is a way to go yet before the new broom can sweep all of the skeletons of Brash's 14-year rein out of the Reserve Bank closet.

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