KEY POINTS:
Most economists are saying the Reserve Bank has done exactly the right thing by putting a stop to interest rate movements today.
Reserve Bank Governor Alan Bollard this morning hit the pause button on interest rate rises following four successive hikes since March that have propelled New Zealand rates to the highest in the developed world.
However, he gave no indication in today's quarterly Monetary Policy Statement he will go into rewind mode, projecting rates will remain around current levels until 2010.
Having boosted the Official Cash Rate from 7.25 per cent in March to 8.25 per cent, Dr Bollard was content today to leave it there, largely as a result of turmoil in global financial markets.
He blamed this wait-and-see approach on the "larger-than-usual degree of uncertainty surrounding the global and domestic economies".
Dr Bollard said credit concerns and heightened risk aversion had increased the likelihood of a weaker outlook for the United States and New Zealand's other major trading partners.
This would be offset by the sharp rise in dairy prices and the decline in the New Zealand dollar in the past month.
He said that there were signs the bank's previous rate hikes were starting to affect the domestic economy and the housing market where sales have slowed sharply.
But consumer price inflation is still expected to rise due to the effects of a lower exchange rate and higher food prices, particularly dairy products.
Further food price rises are expected next year.
The bank raised its forecast for inflation in the year to March 2008 to 2.8 per cent from 2.2 in its June forecast, then rising right to the top of the bank's 1 to 3 per cent target range the following year.
Dr Bollard said he would "look through" the effects of higher food prices unless or until they fed through into wages or other prices.
He said the recent raft of finance company collapses and reduced liquidity in the non-bank lending sector could further dampen activity in some areas of the economy, such as property development or consumer financing.
It was plausible that the impact on activity and confidence could be larger, he added.
"However, we currently expect those negative effects to be contained."
He said most of the failures appeared to be due to inadequate credit management.
Dr Bollard said the housing market had slowed as projected in June and a knock to confidence could lead to a sharper correction.
"To some extent, recent developments have helped speed up the much-needed rebalancing of growth away from the household sector, towards the export sector," he said.
The bank forecasts Gross Domestic Product growth will be 2.9 per cent in the year to March 2008 and will hold at that level in 2009, little changed from its June forecasts.
He said the gains from a doubling in world dairy prices would give a considerable boost to the economy, and some of those gains were expected to be distributed through the wider economy.
He did not expect the turmoil in financial markets to greatly affect dairy prices, which he said had been driven up by higher demand.
Despite the hefty fall of the New Zealand dollar from US81c in late July to US71.30c just prior to the statement, Dr Bollard said the bank viewed the exchange rate as being well above equilibrium.
UBS NZ senior economist Robin Clements said the Reserve Bank had "tread the line pretty suitably".
"It seems fairly neutral and there's no clear indication of a desire to move the cash rate in either direction," he said.
"I think there were some in the market who might have been thinking the bank might have been on the edge of following other central banks around the world to indicate that they may be about to ease rates."
Goldman Sachs JBWere economist Shamubeel Eaqub said he remained comfortable with his conviction the Reserve Bank would begin easing from mid-2008.
"We got everything we were looking for (today)," he said.
"It was a touch more dovish, with acknowledgement of global and local financial market risks, and their inflation assessment lacks a lot of conviction."
ASB chief economist Nick Tuffley said the Reserve Bank had basically kicked for touch to watch developments in the next few months.
"Pretty balanced in the sense that there's a lot of inflation pressure still on the radar, but we've got this huge uncertainty with what's happening in the US economy and what that might eventually mean for our economy and inflation here," he said.
He expected interest rates to remain on hold for "quite a while into next year".
ANZ-National Bank chief economist Cameron Bagrie said the statement was neutral and balanced which he thought appropriate in the current environment.
"You've got both upside inflation risks and downside growth risks," he said.
- NZPA
