The New Zealand dollar reacted sharply to Bollard's latest monetary policy statement, surging from 76.50 US cents before its release to 77.10 half an hour later. Swap rates in the wholesale interest rates market, from which mortgages are priced, were up about five or six basis points across most maturities.
Nick Tuffley, chief economist at ASB Bank, says the central bank is juggling a number of opposing forces. On the one hand, inflation pressures have strengthened with oil and food prices rising while on the other hand the domestic housing market is weakening and the credit crunch is likely to see world growth forecasts revised downwards.
"It's a tug of war, essentially," Tuffley says. "It's fair to say if the world was smooth sailing we probably would have had a rate hike by now or be contemplating one coming through very soon."
Bollard said oil prices are nearly 30% higher than assumed in his September statement and, coupled with rising food prices, "are likely to result in headline inflation above 3 percent for much of next year." Bollard is tasked with keeping inflation between zero and 3% over the medium term.
Doug Steel, an economist at Westpac, says he reads the statement as "being reasonably hawkish. Given the inflation pressures that they've outlined pretty much throughout the (monetary policy statement) document, it seems like interest rates aren't coming down for a very long time."
Craig Ebert, an economist at Bank of New Zealand, says that the more the market digests the statement, the more hawkish it is likely to seem.
The Reserve Bank raised its expectations of where 90-day bank bills will track from 8.60% to 8.80% "basically til kingdom come," he says.
"There's a clear tightening bias." He agrees that it's only the shaky global outlook that stayed Bollard's hand. The credit crunch and resulting tightening of credit criteria have pushed effective interest rates way beyond official rate levels and "effectively, monetary conditions are a lot tighter," Ebert says.
"The world's been like a junkie (on cheap credit) and now it's going cold turkey and world banks are setting up methadone treatments." While New Zealand's central bank is holding rates steady for now, others, noteably the US Federal Reserve have been cutting rates.
