Brian Fallow: Bollard has done something new - and risky

Economics editor Brian Fallow

What Alan Bollard has done today is something quite new, and risky, for a New Zealand Reserve Bank governor. He has committed to keep his policy rate at or below 2.5 per cent for another 18 months or so.

Instead of leaving it for the markets to guess what keeping rates "low for an extended period" means he has told us, in quantified terms.

It is a big risk. Because official cash rate changes take about 18 months to have their effect on inflation he is effectively saying he does not expect inflation to be a problem for the next three years. He may yet have to eat his words

But here and now it suggests he sees the economic recovery which he expects to begin before the year is out will be a slow grind up from the bottom of a very deep gully.

Bollard reminded us today that there are lags, often long ones, between financial markets turning up and the real economy recovering, and between when an economy starts to recover in a statistical sense and when it starts to feel like that to the man in the street.

You can have plus signs in front of quarterly gross domestic product numbers while unemployment is still rising and the feel-bad factor is paramount.

The reason for the unprecedented explicit commitment on the official cash rate outlook is to discourage a repeat of March's burst of must-buy-now activity in the housing market, which drove longer-term interest rates sharply higher. The message is there is no rush.

It will be a long time, he is telling us, before it will appropriate to start singing "happy days are here again."