Brian Fallow : Bollard's cut and paste job no bad thing

Reserve Bank Governor Alan Bollard at this morning's press conference, where he left the Official Cash Rate unchanged at 2.5pc. Photo / Mark Mitchell.

Most of today's interest rate decisions from the Reserve Bank was cut-and-pasted from January's. There is a pretty strong resemblance to December's as well.

This is no bad thing. It does not inspire confidence to have wild swings in the central bank's view of the economic outlook and what it is likely to do.

For the record and as expected, the official cash rate stays at 2.5 per cent and the bank still expects to start raising it "around the middle of 2010".

But this time the bank added that when it does go into tightening mode it might not have to raise the OCR as far, all else equal, as it would in the past.

Its brakes, in short, have become less spongy.

Partly this is because there is a much wider wedge or risk margin than there was pre-crisis between the OCR and what the banks have to pay for funds and then recover from borrowers.

The Reserve Bank expects that to persist as increasingly debt-laden governments compete for funds globally. It leaves the bank with less work to do through the OCR.

Monetary policy should also get more traction from the return to a positive yield curve - where long-term money costs more than short-term money - which has encouraged borrowers to go for floating for short-term fixed rate mortgages. That means there should not be the long lag there was during the last boom between what the Reserve Bank does and its impact in the mortgage belt.

It sees the "relatively sluggish" economic recovery it predicted in previous statements continuing to play out.

It is forecasting economic growth of just over 3 per cent this year which means that it will not be until next September that the economy has fully recovered the ground lost since its peak in 2007 - three lost years.

The 4 per cent growth predicted for 2011 will still be modest compared with previous recoveries.

But the quality of the recovery is looking better - so far - from the bank's point of view. Last year it fretted about the risk of an unsustainable rebound based on a resurgent housing market and debt-fuelled consumption.

Now it expects house prices to go sideways over the next three years, in real terms, and the pickup in consumption it forecasts - 2.8 per cent this year - is hardly rip-roaring.

On the external front, while half of New Zealand's trading partners, led by Australia, are looking good, the outlook for western economies, especially Europe, remains weak.

"We are still talking about a world recovery that is is fragile, That's really what we are waiting for," governor Alan Bollard said.


See Alan Bollard's Policy Assessment here