Reserve Bank leaves cash rate alone

By Phil Boeyen, ShareChat Business News Editor

Wednesday 24th January 2001

The Reserve Bank has behaved in line with finance markets predictions today in leaving the country's official cash rate unchanged at 6.5%.

Although the bank warned last month that a gradual rise in the OCR would be needed this year, it has taken heed of the surprise action earlier this month when the US Federal Reserve cut rates by half a percent.

Reserve Bank Governor Don Brash says since December the New Zealand exchange rate has strengthened and expectations for global growth this year have slowed appreciably.

"This fall-off in expected growth has been most notable in the United States, but is also a feature of the outlook for Australia and for much of Asia.

"Although CPI inflation was marginally higher than we had expected in the December quarter, the main factors driving the spike in inflation were one-off in nature."

Mr Brash says other one-off factors now suggest that the peak in the CPI may be of shorter duration than had earlier been expected, with a reduced risk of spillover from this spike into generalised wage and price setting.

"Given these factors, we feel we can prudently leave the OCR unchanged for the moment. We will have another opportunity to assess the situation when we issue our next Monetary Policy Statement on 14 March."

Mr Brash gave no indication of the future direction for the OCR but Deutsche Bank says it would be dangerous to conclude that the bank has moved to an easing bias.

"We think the RBNZ is genuinely uncertain about its likely next policy move and will be watching the data closely over coming weeks - especially that coming out of the US - as it begins to prepare the full forecast update which will accompany its March MPS," the bank said in a statement.

"If the US slowdown looks likely to remain relatively short-lived... the OCR is likely to remain on hold until the final quarter of this year, at which point a further modest tightening is likely to be contemplated."

However fellow financial firm HSBC is predicting the Reserve Bank will soon start to signal to markets that the next move in rates will be down and says it could happen as soon as this Friday when Mr Brash is due to speak to the Christchurch Chamber of Commerce.

The Council of Trade Unions says although there was perhaps a case to reduce the OCR, it is good news that it has not been increased.

CTU economist, Peter Conway, says it is good that workers who are facing a spike in consumer prices, and volatility in transport costs are not also having to deal with higher interest rates on home mortgages.

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