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Bollard holds OCR at 3%, flags slower path for rate rises

Bollard holds OCR at 3%, flags slower path for rate rises

By Paul McBeth

Dec. 9 (BusinessDesk) – Reserve Bank Governor Alan Bollard held the official cash rate at 3%, as expected, and said future hikes in interest rates will be slower than previously predicted. The kiwi dollar dropped almost half a U.S. cent.

“While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing,” Bollard said in a statement in Wellington today. “Interest rates are now projected to rise to a more limited extent over the next two years than signalled in the September statement.”

New Zealand’s stalling economic recovery put the central bank on hold in September as households focused on repaying debt in favour of ramping up spending. Though that’s helping to rebalance the country’s woeful savings record, it’s slowing down already-sluggish property and retail sectors.

“The local recovery continues to frustrate, for the most part, and renewed global uncertainties also argue for the RBNZ to sit with its stimulatory 3% OCR setting for the near future,” said Mike Jones, strategist at Bank of New Zealand, before the statement was released. “The RBNZ could start up again in March, as remains our core view, or conceivably wait until June.”

The bank pared its forecast for the 90-day bank bill, having already shaved more than a percentage point from projections in the second half of 2011 in the previous statement, and is predicting it will stay sub 4% until the June quarter in 2012.

The New Zealand dollar fell to 74.53 U.S. cents from 74.94 cents immediately before the statement was released. The trade-weighted index fell to 67.47 from 67.84.
Today’s pause mirrors the Australian and Canadian central banks, which also held their benchmark rates this week, as the global economy remains shaky amid heightened concerns over European sovereign debt and America’s ability to revive its sagging recovery.

Before the release, traders were betting the RBNZ will hike the OCR by 69 basis points over the coming year, narrowing the gap with its Australian counterpart, which has 31 points priced in, according to the Overnight Index Swap curve.

Bollard said the economic recovery in the U.S. and the U.K. was “a little stronger” than predicted, though New Zealand still faces “downside risks to global growth and export prices.”

The bank reined in forecast growth for New Zealand’s economy in the near term, saying the 7.1 magnitude Canterbury earthquake was estimated to have cut growth by 0.1 percentage points in the September quarter. The RBNZ lifted its projected cost of the quake to $5 billion, adding another billion dollars to the residential property bill. The bank slashed its forecast growth in the September quarter to 0.3% from 0.8% in its last statement.

Still, earthquake repairs and high export prices are expected to lift gross domestic product through the latter half of next year, with quarterly growth peaking at 1.4% in the September quarter.

Construction and manufacturing are still struggling to fire, with soft data released yesterday raising the prospect of an economic contraction in the third quarter. That feeds into the general malaise in the economy, though strong commodity prices have helped alleviate some of the pessimism.

Bollard said the slow pick-up in GDP will gradually lead to an increase in underlying inflation. The recent spike in the headline consumer price index from the government’s hike in consumption tax wasn’t impacting on how businesses were setting prices or negotiating wages, he said. Though the GST increase pushes the CPI beyond the bank’s target band of between 1% and 3%, Bollard can ignore short-term fluctuations.

The bank lifted its forecast for annual inflation rates over the next three quarters by 0.2 percentage points from its September statement, though the track is expected to be slower in later periods.

Bollard continued his lament over the strength of the New Zealand dollar, saying it’s “inhibiting the rebalancing of economic activity towards the tradable sector.”

The bank raised its forecast for the trade-weighted index of major trading partners’ currencies by almost 5% over the next two years, and Bollard said an improved savings rate and faster action by the government to cut its fiscal deficit would ease pressure on interest rates and the currency.

Bollard took a swipe at government spending in a break-out box in the statement, saying the crown accounts were about 7 percentage points worse than in 2008.

“Much of the deterioration in the fiscal position appears more structural, and will persist even as the effects of the recession fade,” the statement said.


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