Hawkish and dovish views of the OCR

Those of a hawkish mind might choose to focus on the Reserve Bank's firm 4% growth forecast for 2011, while those of a dovish mind might have noted that current policy is tighter than implied by the 2.5% cash rate according to BNZ economist Tony Alexander.  

Monday, March 15th 2010, 4:46PM

In the BNZ Weekly Overview he looks at the Reserve Bank's decision last Thursday to leave the Official Cash Rate (OCR) at 2.5% with a rise to come in the middle of 2010.

Alexander says the Reserve Bank quite rightly noted that monetary policy at the moment is actually tighter than implied by the 2.5% OCR because of a higher exchange rate and much higher bank funding costs.

"This is seen most easily if one considers that a 2.5% cash rate would normally produce term deposit rates near 2.5% and not the 4.5% - 5.0% range commonly offered by banks now.

"In fact the Reserve Bank estimate that the cost of bank funding is now around 1.2% higher in aggregate than before the global crisis, implying the current 2.5% official cash rate is more like a 3.75% rate of old."

He says BNZ still forecasts that the Reserve Bank will increase the OCR on June 10 and every six weeks after that through to early 2012.

Based on this expectation there is also a graph showing what BNZ predicts will happen to one, two and three-year fixed rates if the OCR rises on either June 10 or September 16.

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