OCR announcement 'wasted opportunity': strategist

Reserve Bank governor Dr Alan Bollard Photo / Mark Mitchell

The Reserve Bank is being criticised for not being more flexible in its statement leaving the official cash rate (OCR) unchanged at 3 percent.

In the statement today, Reserve Bank Governor Alan Bollard highlighted recent economic data that was weaker than expected, while pointing to factors that could support the economy in the coming year.

On the future course of the OCR, Dr Bollard made some minor changes to the wording he had used in his mid-September announcement.

"While it is appropriate to keep the OCR on hold today, it remains likely that further removal of monetary policy support will be required at some stage," Dr Bollard said today.

In September he had said: "Over time, it is likely that further removal of monetary policy support will be required."

TD Securities senior strategist Annette Beacher said the Reserve Bank had left a tightening bias intact.

"This was a wasted opportunity to be more flexible about the outlook for the cash rate, and indeed perhaps introduce an 'on hold for foreseeable future' theme," she said.

Beacher also said there was little value in over-analysing Dr Bollard's brief communique, and she expected the OCR to remain on hold until March.

BNZ economist Doug Steel suggested people "make of that what you will" when contemplating Dr Bollard's addition of the phrase "at some stage" when referring to the likely need for the OCR to rise.

"The difference and distinction between economic conditions today and those that are likely to prevail in future is the main driver behind holding rates steady today, but maintaining the prospect of higher rates next year," Steel said.

The bigger question was how far rates would eventually need to rise, rather than the precise timing of the next hike.

BNZ still expected growth next year to be stronger than the 2.5 per cent forecast by the Reserve Bank, with more inflationary pressure that would see rates eventually push higher than many anticipated, Steel said.

Activity indicators in the most recent business surveys suggested growth was likely to pick up to the 3-4 percent range by mid-2011.

"We anticipate growth of around 4 percent over the coming 12 to 18 months which would soak up spare capacity quicker than the RBNZ currently presumes bringing more inflationary pressure and higher interest rates than either the RBNZ currently projects or the market currently has priced in."

ANZ chief economist Cameron Bagrie and head of market economics and strategy Khoon Goh said they expected the OCR to reach 4.25 per cent by the end of 2011, and rise towards 5.25 per cent over 2012.

"This is modest by historical standards, but more aggressive than current market pricing."

They expected the loss of momentum in the economy during the second and third quarters was nearing its end, and that signs of a pick-up would start to become evident. The conditions for improvement were in place.

- NZPA