Rate rise expected to hit borrowers quickly - when it finally arrives
Economists are still predicting the Reserve Bank will start lifting interest rates in June or July, although a subtle change of wording yesterday has given it more flexibility.
Reserve Bank Governor Alan Bollard yesterday left the Official Cash Rate (OCR) unchanged at 2.5 per cent - where it has been since April 30 last year.
The economy was recovering broadly as expected and growth was predicted to pick up further during the year, Bollard said.
"As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected," he said.
In a statement last month Bollard said he expected to begin removing stimulus "around the middle of 2010".
Goldman Sachs JBWere economist Philip Borkin said the change of wording was semantics but gave the bank some wriggle room.
Business confidence data this week and the more upbeat nuances with regard to the Reserve Bank's expectations for growth had seen the pendulum swing more towards an interest rate rise in July than September, Borkin said.
A lot of people had borrowed for shorter duration or using floating rates, he said.
"So when the Reserve Bank actually comes to tighten ... if that gets passed on to borrowers, they're going to feel it a lot sooner than those who're on the three years and beyond, of which there's not that many at the moment," he said.
"So when they do start to tighten, they should get a bit of traction straight away which, compared to the previous tightening cycle over 2007, that's quite a different dynamic."
Borkin expected the Official Cash Rate to eventually rise to between 5 and 5.5 per cent by the end of 2011.
"Depending on how the economy performs over the next 24 months, will determine whether rates need to move into more restrictive territory to try and rein things in a little bit," he said.
ASB chief economist Nick Tuffley said the Reserve Bank had given itself room to manoeuvre - but the wording of the statement in a lot of ways was still basically saying June or July.
"What's likely to dictate whether the Reserve Bank goes in the next meeting or waits a bit longer is the list of significant events that we've got between now and even just the June monetary policy statement," Tuffley said.
The Budget was a source of uncertainty, he said.
"Whether or not it's delivering extra stimulus to the economy will be something the Reserve Bank will be wary of but also any changes to tax policy that affect housing and how much of an impact that will have."
Information about employment would be available in May, with details on gross domestic product in late June, and the consumer price index and quarterly survey of business opinion in July.
The housing market and retail spending had both been starting to look a bit soggy, Tuffley said.
An increase in interest rates tried to dampen demand growth in the economy by making debt servicing costs rise and reducing the demand for credit, he said.
"Right at the moment credit growth is still very sluggish so there's not the burning need to try to rein in credit growth that might trigger some inflationary pressures down the track as well."
The Reserve Bank had noted things were getting better globally but the risks were becoming more polarised, Tuffley said.
"It's very encouraging to see Asia continuing to recover at a pace," he said.
"But you've just got these looming dark storm clouds growing over Europe.
"The debt problem there just seems to be getting more and more worrisome by the day."
REACTION TO CASH RATE DECISION
Phil O'Reilly, Business New Zealand chief executive
"No change in the [Official Cash Rate] is an appropriate response to current conditions.
"Inflationary trends aren't much in evidence and though business and consumer confidence are high, they probably reflect relief at the recession's end rather than strong buying or investing intentions.
"Steady as she goes is a reasonable policy."
Bill Rosenberg, Council of Trade Unions economist and policy director
"The Reserve Bank is already using liquidity requirements to try to reduce the dependence of the big four banks on short-term overseas funding.
"The Government and Reserve Bank should be looking even further for ways to avoid choking off the economy's recovery and future development.
"It should not revert to a single-minded focus on inflation, using only interest rates to restrain prices."
Philip York, Federated Farmers economics and commerce spokesman
"Half of the country's dairy herds are in drought zones at the moment, so although they'll be getting a higher payout these will probably be offset by less production.
"This drought, like previous droughts, will have wider economic impacts. This is another important reason to be cautious about increasing the [Official Cash Rate]."
