Bollard offers little prospect of lower interest rates

Reserve Bank Governor Dr Alan Bollard

Reserve Bank Governor Alan Bollard held out little hope of relief for borrowers in the bank's quarterly review of monetary conditions out today.

As expected, he left the Official Cash Rate (OCR) unchanged at 6.75 per cent, and his commentary statement suggested persistent and heightening inflation pressures offered little prospect of any easing in rates.

"With inflation projected to remain around 3 per cent through most of this year and next, a firm policy stance will be required for some time.

"We will be watching closely to see if inflation pressures are contained, and further tightening in monetary policy would likely be required if there are upside surprises to the inflation outlook.

"Certainly, there is no scope for an easing in policy in the foreseeable future," Dr Bollard said.

The firm stance was despite the fact that the economy is on already assessed to be on a slowing path. The bank projects GDP growth to fall from 4.25 per cent in the March 2005 year to 2.75 per cent in 2006 and 2 per cent in 2007.

Although Dr Bollard did not restate his April comment that "a further policy tightening cannot be ruled out", the tone of his statement remained "hawkish".

Inflation is projected to linger near the top of the 1-3 per cent band the bank is mandated to hold it within until 2008, and Dr Bollard warned that if economic growth is stronger than projected, the bank would have to hike rates again.

He said inflation had become more broadly based and medium-term inflation pressure had, if anything, increased.

The balance of inflation risks remained on the upside and the outlook for short-term interest rates was slightly higher than previously forecast, he said.

Overall, the bank's projections were largely unchanged from its previous set in March.

Dr Bollard noted that activity remained strong across many parts of the economy and some sectors were stronger than anticipated, despite the recent sharp fall in business confidence.

Capacity was still stretched and labour shortages were at record highs. Some export prices had firmed and household spending and the housing market had been stronger than expected.

The bank estimates the economy rebounded from a mild slowdown in the second half of 2004 and Dr Bollard thinks the downturn in business confidence has been overstated.

"However, there is sufficient evidence that the economy is slowing and that past policy tightenings are yet to have their full effect, for us to leave policy on hold at this point.".

The housing market had softened, although not as much as expected. The bank expects a sharp decline in house price inflation in the coming years, although that will come later than the bank projected in March.

The New Zealand dollar made a small move higher in immediate reaction to the announcement. By 9.10am it was buying US71.31c from US71.11c an hour earlier and US71.54c at 5pm yesterday.

ANZ Investment Bank head of foreign exchange John Body said the kiwi's reaction was "reasonably muted".

"The kiwi is still well within the range of the last 24 hours so really the market's going to sit and wait for data," he said.

"The central bank have made it quite clear in the last statement and in the subsequent updates... that they didn't see room for any imminent easing and they've once again reinforced that.

"If data suggests that inflation outcomes are at risk we can expect an increase in the cash rate at the next meeting," he said.

Kiwibank responded immediately to this morning's announcement, cutting its two year fixed mortgage rate to 7.35 per cent from 7.5 per cent previously.

- NZPA