RBNZ sets rates floor that could last 18 months

Reserve Bank Governor Alan Bollard the global economy had deteriorated further than expected in the first quarter of 2009. File photo / Mark Mitchell

Reserve Bank Governor Alan Bollard did something very unusual today.

He gave a prediction for the Official Cash Rate (OCR) in 18 months time, which is the longest I've ever seen him give a prediction for the OCR. A lot can change in 18 months, but he wants to influence the longer term wholesale interest rate markets to drive longer term fixed mortgage rates lower.

"We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters," Bollard said in his statement announcing another 50 basis point to 2.5 per cent.

This is a much better way to influence markets than either the usual jawboning or the last resort, going into the market to buy bonds and print money in an effective quantitative easing.

He is clearly targeting the same wholesale markets that appeared to defy him after the March 12 rate cut. Back then he said there was still likely to be further cuts, but that the rate of easing had slowed and the OCR was not likely to get anywhere near the OCR seen in other countries such as the United States and the United Kingdom.

The markets, and many homeowners interpreted this as meaning interest rates had stopped falling and were likely to rise. Many banks rushed into the markets to hedge their risks and simply pushed up long term interest rates ahead of themselves.

That triggered Bollard's unscheduled press statement on April 1 saying the rise was unwarranted.

Now he's trying something different. He is setting an effective rates floor, similar in a way to the Bank of Canada's move last week to set a floor for a long period, albeit at 0.25 per cent.

This is clever monetary policy making and avoids the spectre of quantitative easing.

What are your thoughts?

- Bernard Hickey

- INTEREST.CO.NZ