No let up for borrowers as Bollard talks tough on rates

Reserve Bank Governor Alan Bollard.

Home owners hoping for interest rate relief were left wanting this morning after Reserve Bank Governor Alan Bollard again left the official cash rate unchanged at 6.75 per cent.

In a toughly worded statement, Dr Bollard said that with inflation predicted to exceed the RB's 1-3 per cent target band in the coming quarters there was "no prospect of policy easing in the foreseeable future".

"In the current environment, monetary policy must remain vigilant," Dr Bollard said.

While the economy was showing signs of softening, inflation pressures still posed too great a risk to begin easing rates.

"Several years of strong growth have led to productive resources becoming stretched and the resulting inflation pressures will take some time to unwind," Dr Bollard said.

"Moreover, additional short-term inflation pressures have recently emerged as a result of surging oil prices and the waning impact of the strength of the exchange rate over recent years."

The New Zealand dollar was trading at around US68c on the news.

Dr Bollard said GDP growth -- particularly in the manufacturing sector, which has been exposed to the strong exchange rate -- has eased in recent quarters. Business activity was also slackening, along with household consumption growth.

But residential housing market indicators remain firm, representing an "upside risk" for future household spending and inflation.

Any inkling Dr Bollard has of hiking interest rates any time soon should have been erased after reading yesterday's horror trade figures.

Soaring oil prices, a continued spend-up on imported consumer goods and deteriorating exports as a result of an over-valued currency sent the trade deficit to a massive $522 million in June, according to Statistics New Zealand figures.

The New Zealand dollar jagged around in a narrow range just above US68c immediately after the announcement.

ANZ Investment Bank chief dealer in New Zealand Murray Hindley said kiwi dollar trading had been choppy.

"It was as the market anticipated," he said of Dr Bollard's statement. "It looks pretty hawkish."

Mr Hindley said the latest batch of economic data, paticularly yesterday's June trade deficit, suggested an economic slowdown.

Against that, he said Japanese investors still had an appetite for New Zealand's interest rate yield and they had been the supporting the currency recently.

BNZ research economist Stephen Toplis said the statement was largely in line with expectations.

"The key message in this still is that the central bank has no intention whatsoever of lowering interest rates in the forseeable future.

"Other than that, they are just acknowledging all the data we have been seeing over the past few months which is clearly showing that the economy is softening. But against that, the inflation path remains well and truly anchored at the top end of the target range."

Goldman Sachs JB Were economist Bernard Doyle said statement's tone was more dovish than the bank's previous statement last month. He said the economy had slowed faster than the bank had forecast, "so they had to acknowledge that softness in the first part of the statement".

"But then they turn hawkish again, noting that inflation is at the top of the target band. Still you have to wonder how much intent there is behind that hawkishness, and we suspect it's highly unlikely they will follow through on it and actually tighten.

"Overall, there's a discernible softening in tone in the statement, but it would take a bolt from the blue to force a rate move in either direction in the medium term."

- NZPA