Bollard sticking to the script

Reserve Bank governor Alan Bollard stuck to the script in leaving interest rates unchanged and indicating he may start hiking about the middle of the year.

Thursday, March 11th 2010, 9:56AM

by Jenny Ruth

Bollard left his official cash rate (OCR), which helps determine floating mortgage rates and influences fixed rates, unchanged at a historically low 2.5% where it has sat since April last year.

"The chorus was set in January. It's not a particularly exciting song and they're just repeating the chorus," says Brendan O'Donovan, chief economist at Westpac.

The message is the economy is recovering but it's weaker than previous recoveries and, because of the depth of the hole the economy fell into, there's plenty of spare capacity and little inflation, O'Donovan says.

The central bank's forecasts indicate the OCR is likely to be about 5.75% in three years time, he says.

David Plank at Deutsche Bank says there was little in the way of market reaction although the New Zealand dollar fell about 20 points.

"In the context of these things, that's a relatively small move. Perhaps the market was worried about the risk he (Bollard) might be a bit more hawkish," Plank says.

While Bollard expects the economy to recover, "it's still an expectation rather than a reality," which means there's no urgency about raising the OCR, he says.

Craig Ebert at Bank of New Zealand praises Bollard for holding the line. "There was no reason to try to take a punt on which way the wind's going to blow," Ebert says.

"If you go back to the middle of last year, they've (the Reserve Bank) forecast this process really well, far better than the market."

Depending on the data, Ebert is still expecting the first hike in the OCR will be in June. However, "there are still a lot of buffeting winds which could blow it either way."

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