Bollard to hold rates unchanged

Monday 7th December 2009

Reserve Bank Governor Alan Bollard is expected to take no heed of his Australian counterpart’s policy tightening, opting instead to keep the official cash rate at a record low as the economy takes a slower recovery path.

Bollard will keep the OCR at 2.5% when he releases his review of monetary policy on December 10, according to a Reuters survey. Economists are divided on whether he will maintain the wording of recent statements that rates will stay low until the second half of 2010.

The domestic economy has probably picked up pace since emerging from recession in the second quarter with a modest 0.1% expansion. House price growth has accelerated, international prices for milk have soared since mid-year and inflation has proved more resilient in the face of recession than some economists had anticipated. Added to that, growth in export markets such as Australia has held up.

“The pace of recovery has proven to be stronger than expected, and it’s also becoming apparent that the recession hasn’t done as much to alleviate inflation pressures as expected,” said Brendan O’Donovan, chief economist at Westpac Banking Corp.Unlike the previous MPS, there’s been little offset from a higher kiwi dollar and the December MPS is expected to have “a markedly more hawkish tone.,” he said.

The New Zealand dollar peaked just shy of 76 US cents in late October. Since then, the currency has drifted lower, trading at 71.50 US cents in New York on Friday.

House prices reached a 10-year high in October, with the median price climbing to $355,000, according to Real Estate Institute figures. The institute’s stratified median, preferred by the central bank, has climbed to $370,000 and is now just $10,000 below its peak of 2007.

The price of milk powder climbed 3.6% to a 15-month high at Fonterra’s December auction and has surged 95% its low in July, reflecting a global recovery in prices of dairy products, New Zealand’s biggest export.

The central bank’s Expectations Survey showed respondents see inflation speeding to a 2.6% annual rate from 2.3% over the next two years.

Inflation accelerated in the third quarter, with the Consumer Price Index rising to 1.3%, for an annual pace of 1.7%, according to government figures. That’s greater than the 1.2% annual pace the RBNZ was expecting.

“As far as surprises go for inflation that’s about as big as they get,” said Jane Turner, economist at ASB. “Despite the recession, domestic inflation is proving very stubborn to unwind. As the local recovery has progressed, the downside risks to the inflation outlook have diminished rapidly.”

Turner expects the RBNZ to “continue with its deliberately dovish tone in both the December and January announcements” after warning in October that markets were being too aggressive in pricing in an early rate hike.

“But the longer the RBNZ sticks to that script in a generally-improving environment, the more rapid the eventual shift in stance is likely to be,” she said.

ASB expects Bollard to boost the OCR by 50 basis points in April.

The MPS may also dwell on the implications of the Emissions Trading Scheme, which became law this month, meaning the RBNZ can no longer exclude its potential impact. Also stemming from fiscal policy, is the increase in costs of ACC levies.

“As in October we expect the bank will cite evidence that the economy is growing again, albeit tentatively, and that increased activity is also beingseen in New Zealand’s major trading partners,” said Darren Gibbs, chief economist at Deutsche Bank.

“But we expect that the bank will continue to fret” about the “significant vulnerabilities” in many economies, the high kiwi dollar and the recovery in house prices.

Businesswire.co.nz

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