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OCR unchanged, but rates hikes sooner than later

RBNZ’s Bollard keeps OCR unchanged, signals earlier rates hikes next year

By Paul McBeth

Dec. 10 (BusinessWire) – Reserve Bank Governor Alan Bollard kept the official cash rate unchanged at a record low 2.5%, as expected, and brought forward the likely timing of interest rate increases, forecasting a fastger pace of economic recovery.

“The economy continues to recover, reflecting improved world growth, higher export commodity prices, increased government spending and housing strength,” Bollard said in a statement released in Wellington today.

He dropped his insistence that rates will stay low until the second half of next year.

"Conditions may support beginning to remove the monetary stimulus around the middle of 2010," he said.

The central bank will have to walk a fine line over stoking economic activity without over-egging it as inflation begins to speed up ahead of Bollard’s expectations and the housing market continues to show signs of emerging from the lethargy of the past 18 months. The Reserve Bank’s Expectations Survey found respondents see inflation accelerating to a 2.6% annual pace from 2.3% over the next two years. Prices unexpectedly rose in the third quarter, with the Consumer Price Index increasing to an annual 1.7%, according to government data, ahead of the 1.2% pace forecast by the RBNZ.

“Domestic inflation is proving very stubborn to unwind,” ASB economist Jane Turner said in a report before the announcement. “As the local recovery has progressed, the downside risks to the inflation outlook have diminished rapidly.”

Before today’s statement, traders had been betting the central bank would hike the OCR by 1.63 percentage points in the next 12 months, based on the Overnight Index Swap curve. The scale of expected tightening has declined in the past month as Bollard reiterated the divergence of monetary policy between New Zealand and Australia, where rates have been rising for the past three months.

The trade-weighted index for the New Zealand dollar, the central bank’s preferred method of tracking the currency, has climbed more than 24% from its low in March, and has damped Bollard’s preferred export-led recovery.

New Zealand climbed out of its first recession in a decade in the second quarter this year as returning expatriates and an inflow of new migrants helped underpin the housing market, and boost business and consumer confidence.

Consumer spending has shown a small spark ahead of the Christmas shopping season, with core retail spending on electronic cards, which excludes auto-related sales, up 0.3% according to Statistics New Zealand, while property values were higher than where they were last year for the second month in a row, according to QV Valuations data.


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