KEY POINTS:
Reserve Bank Governor Alan Bollard's comments yesterday were seen as endorsing the view that interest rates are unlikely to rise any further, but that they won't fall until late next year.
As expected Bollard left the official cash rate on hold at 8.25 per cent.
Bollard ignored the latest inflation reading - an unexpectedly low 1.8 per cent - and stressed instead that core inflation pressures persist as incomes benefit from a tight labour market and strong export commodity prices.
Rising global food prices and the effect on energy prices of the Government's planned emissions trading scheme added to the inflation risks, he said
And there was a stern warning about the prospects of fiscal largesse next year. "Any further easing in fiscal policy beyond that already announced will add further upside risks to inflation."
On the other side of the inflation scales he said there were signs that the housing market was moderating, "considerable uncertainty" still about the fallout from turbulence in global financial markets, and a high dollar restraining the export and import-competing sectors.
Interest rate and exchange rate markets shrugged off Bollard's statement. ASB Bank chief economist Nick Tuffley said market pricing implied little chance of a movement in the official cash rate until the second half of 2008.
With an outlook showing inflation hugging the top of its target band the bank could have talked a lot tougher, First NZ Capital economist Jason Wong said.
"But clearly the bank thinks that achieving inflation outcomes that average just under 3 per cent is consistent with its policy targets agreement. Strictly speaking that is true, but the risk for the bank is that it is entrenching inflation expectations around the 3 per cent mark, which will make bringing the average inflation rate down to a more respectable 2 per cent a much tougher job."
Westpac chief economist Brendan O'Donovan said Bollard was right to warn the fiscal authorities about a lolly scramble, but should brace for one anyway. "Prudence rarely wins close elections," he said.
"We share the Reserve Bank's nervousness about inflation over the next couple of years. There are huge upside risks from higher food prices, energy, wages, rents and carbon costs."
Consumer spending was already running hot, O'Donovan said, and there would be more next year when the "tidal wave" of dairy cash hit.
"The notion that farmers won't spend it is being shown up as rubbish." A Reuters survey yesterday found only three of the 16 economic forecasters polled expect higher rates by the middle of next year, while another three expect the bank to have started easing by then.
Bank of New Zealand economist Stephen Toplis said: "We think the Reserve Bank is playing the game just right."
Holding the line
* Reserve Bank leaves the official cash rate on hold at 8.25 per cent.
* But it warns the politicians about a fiscal lolly scramble.
* And frets about higher wages and food and energy prices.
