Bollard holds OCR at 2.5%, flags threat of rising bank funding costs

By Paul McBeth

Jan. 26 (BusinessDesk) – Reserve Bank Governor Alan Bollard held the official cash rate at 2.5 percent, saying international financial markets are still threatening to push up local bank funding costs, and New Zealand’s economic recovery may be constrained by delays to the Christchurch rebuild.

“Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold,” Bollard said in a statement. The international climate has “improved slightly” but the global economy is still “fragile and risks to the outlook remain,” he said.

Europe’s debt crisis has pushed up international borrowing costs, and Bollard warned that “will likely pressure funding costs for New Zealand banks over the coming year.”

Last month the Reserve Bank said higher bank funding costs were a “particular concern” as they could raise the cost of borrowing for households and firms independent of changes to the OCR.

Market analysts expected the decision, and aren’t picking a rate hike until the end of this year or early 2013. Before the release, traders were betting on a rate cut as an outside chance in the coming year, pricing in a 5 basis point reduction to the benchmark interest rate over the next 12 months, according to the Overnight Index Swap curve.

Bollard said the recent appreciation of the New Zealand dollar, which is trading near three-month highs against the greenback, have trimmed returns for exporters who have enjoyed elevated prices for commodity items.

Government figures showed gross domestic product expanded 0.8 percent in the September quarter, and Bollard said New Zealand’s economy is showing modest growth, with limited recovery in consumer spending and the housing market.

Real Estate Institute figures showed a pick-up in house sales last month, though they are still at subdued levels, while the latest ANZ Roy Morgan Consumer Confidence survey found respondents to be buoyed by the summer season.

“Repairs and construction in Canterbury will also provide a significant boost for an extended period, though there may be further delays resulting from the aftershocks,” he said.

Any fears Bollard had about inflationary pressures were quelled by last week’s consumers price index, which unexpectedly fell 0.3 percent in the final three months of last year, taking the annual pace of inflation to 1.8 percent. That figure was the first to wash through the impact of the government’s hike in consumption tax in 2010, which boosted the headline number by about 2 percentage points.

Bollard said “inflation pressures have remained well contained,” and is now sitting below 2 percent, the middle of his target band between 1 percent and 3 percent.

The Reserve Bank backed away from tighter monetary policy last year after the US had its credit rating downgraded when legislators hit a deadlock over lifting the nation’s debt cap, and Europe’s sovereign debt crisis escalated, threatening global economic growth.

Prime Minister John Key will give a speech in Auckland today outlining how the government sees the local economy, and is expected to give an update on whether his administration’s target to return the books to surplus by 2014/15 is still within reach.

Today’s statement comes after the US Federal Reserve extended the likely timeframe for its near-zero interest policy until late 2014. The Federal Open Market Committee said it expects modest economic growth, and a gradual decline in the elevated rate of unemployment.

Last month, the Reserve Bank reined in its forecast track for the 90-day bank bill, often seen as a proxy for the OCR, and said “monetary policy is projected to remain supportive for some time.” The bank forecast the 90-day bank bill gradually rising through the second half of this year before settling at 4 percent in September 2013.

That trimmed 30 basis points from the top of the forecast, and removed a sharp increase in the June quarter next year. Bollard had already pushed out the prospect of rate hikes and trimmed the top of the 90-day bank bill forecast in the September monetary policy statement.

(BusinessDesk)

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