Bollard sticks to his guns on interest rate

Alan Bollard at the finance and expenditure select committee hearing in Wellington. Photo / Mark Mitchell

While acknowledging a somewhat brighter outlook for the global and domestic economies, Reserve Bank governor Alan Bollard yesterday stuck to his guns, reiterating his view the Official Cash Rate will remain "at or below" its current 2.5 per cent until late next year.

Generating a sense of deja vu amongst journalists, economists and MPs, he emphasised the risk to the export-led recovery posed by the uncontrollably strong currency and a potential revival of rampant house price inflation.

Overall inflation - his primary target - remained "comfortably under control" in the short and medium outlook.

In his statement, the governor spoke of more evidence the decline in economic activity was coming to an end.

Further evidence of a broad-based recovery among our major trading partners, a stabilisation in domestic retail spending, and a net inward migration-driven pick-up in the housing market represented "a story that's a little bit more positive than we've had in recent months", he told Parliament's finance and expenditure committee yesterday.

But the tentative signs of recovery were "patchy" and the medium-term growth outlook remained weak.

For a sustained recovery "there is a need for improved competitiveness in the export sector and a continued recovery of household savings" to stabilise New Zealand's external payments position.

"If the exchange rate were to continue its recent appreciation and/or the recovery in house prices were to undermine the improvement in household savings, then the sustainability of the present recovery will be brought into question."

The Reserve Bank expected "to keep the OCR at or below the current level through until the latter part of 2010" in order to nurture the tentative recovery.

Economists were divided on whether Bollard's statement represented a move from an easing to a neutral bias but most highlighted the bank's concerns about the strength of the New Zealand dollar, which dipped briefly to US69.22c in response to the monetary policy statement but recovered to close within a few points of its fresh 12-month high above US70c hit early yesterday morning.

The markets continue to price in rate hikes sooner than the Reserve Bank's guidance, but BNZ economists said they were missing the point that any surprises the Reserve Bank had received from the apparent improvement in domestic and international economies "would be offset by the impact of the ever-rising New Zealand dollar".

Bollard said the currency issue was an all too familiar one but with some different nuances.

This time its relative strength was related to appetite among investors for risk as global equity markets recovered and it was "very much a US dollar story".

A number of other countries faced the same challenge and their attempts to tame their currencies had partly informed the Reserve Bank's own thinking.

Bollard told the committee the bank had considered whether cutting the OCR would have had any effect and concluded overwhelmingly it would not.

"In addition we are always very alert to not wanting to spark off an unnecessary or unbalanced housing revival."

The bank noted some small upward house price movements in recent months but felt these would be reversed as potential vendors became more confident about the prices they would achieve. Beyond that it saw house prices as probably remaining stable for some time.

If not, there was some scope to influence the market and Bollard noted regulatory moves by global banking authorities to avoid asset bubbles. "And we expect to be in line on that."

The key tool in future was perhaps tax.

"The most obvious part of that would be around taxation on people intending to flick on investor housing."

The Reserve Bank may be clinging to its guidance that rates will stay low but its expectations around 90-day bank bill rates - as good an indication of its intentions as any central bank provides - illustrated its view that when it hikes, it will do so quickly and probably in 50-point jumps.