Brian Fallow: Bollard tells markets 'not so fast'

"Not so fast" is Alan Bollard's message to the financial markets today.

As widely expected the Reserve Bank governor has flagged an earlier start to the next official cash rate tightening cycle than the "'latter part of 2010' which has been his line since April 30.

"We expect to keep the OCR at the current level [2.5 per cent] until the second half of 2010" is the key line in today's statement.

But he also makes it plain he thinks the markets have have got ahead of themselves pricing a rate hike as early as the first quarter of next year, perhaps even January.

Bollard knows, of course, that the banks will raise the rates which matter to borrowers in advance of the official policy moves which sanction them. In some cases they already have.

It would not have been credible for him to fold his arms and not soften his stance. A gap of more than 200 basis points had opened up between where the markets see the OCR in a year's time and the "no change until the latter part of 2010" line.

But he is right to remind the markets of the fragility of the recovery. It is too soon to take the plaster cast off.

The bank's statements acknowledges the run of data since the last OCR review six weeks ago which have encouraged the markets to drive up short-term wholesale rates.

New Zealand's trading partners are rebounding though "significant vulnerabilties remain."

Domestically the housing market has largely recovered, household spending is increasing - "very gradually" - and Government spending is supporting economic activity.

But the bank also points to weak business spending, subdued credit growth and, most of all, the high dollar.

"The current composition of growth continues to raise questions about its sustainability."

There is also a clear message to the Government about sharing the load of unwinding the stimulus, when it becomes appropriate to do so. "Further ahead, removing some of the fiscal stimulus is likely to reduce the work monetary policy will otherwise have to do."