Shutting door on rate rises raises an eyebrow

By BRIAN FALLOW

Reserve Bank Governor Alan Bollard might have scored an own goal by being so explicit that he had finished raising interest rates, economists said yesterday.

Because of the hawkish tone of his monetary policy statement only six weeks ago, Bollard had been expected to at least leave the door open to a further rate hike.

Instead he all but slammed it shut when announcing the official cash rate would be raised 25 basis points to 6.50 per cent.

The two reasons he gave were the strength of the dollar and confidence his recent interest-rate hikes would eventually work their way through the economy.

But the dollar fell after the announcement, ending the day six-tenths of a cent lower against the United States dollar and 1.25 cents lower against the Australian.

Wholesale interest rates also fell as soon as the statement came out.

Westpac chief economist Brendan O'Donavan said they would fall further, driven by international investors who had just been waiting for confirmation the bank had finished easing.

This occurs in the middle of a price war among the banks for the fixed-rate mortgage market. Cheaper wholesale money gives the banks extra ammunition to use in that war, allowing them to sustain lower fixed-rate mortgages for longer.

It is a counter-productive outcome for a central bank trying to push households' debt-servicing costs up and their spending power down.

O'Donovan said that, perversely, Bollard had delivered an easing to the household sector even as he raised the official cash rate.

BNZ economist Stephen Talipes said Bollard was gambling that forecasts of a slowdown and the ensuing drop in inflation pressure would come to fruition.

"This is either a brave and visionary approach or a foolhardy one."

ANZ National chief economist John McDermott said the problem with Bollard's call was that if the dollar continued to drop or if he found he had reignited the housing market he might have to backbite.

"Why make December's decision today and box yourself into a corner?" he asked.

Deutsche Bank chief economist Ulf Schoefisch said ending the tightening was the right call but the problem with so clearly saying so is that the markets always brought forward the next move, which it was now clear would be an easing.

He expects the Reserve Bank to start cutting rates in the second half of next year. The markets agree; they have priced in a 25-basis point fall by next September.