OCR holds, mid-year rate hike still likely

Thursday 28th January 2010

Reserve Bank Governor Alan Bollard kept the official cash rate at a record-low 2.5% as expected, and said the gradual recovery in the economy was in line with expectations and gave him breathing space to stick to his timeline of a mid-year rate hike.

"If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010," Bollard said in a statement. The central bank is picking the economy to grow 3.1% this calendar year, according to its December forecast, after it came out of its worst recession since 1991 last year.

Echoing his serve to policy makers over government spending in December, Bollard said "fiscal consolidation would help reduce the work that monetary policy might otherwise need to do" as growth begins to sustain itself. Annual inflation is in the "centre of the target band" of between 1% and 2% and "expected to track comfortably within the band over the medium term," Bollard said.

Last week, data showed consumers prices fell in the fourth quarter of 2009, in line with central bank forecasts. That gave Bollard room to hold off from hiking rates too early, according to debt collection agency Dun & Bradstreet, in its 2010 Economic Outlook. The annual Consumer Price Index is forecast to track below 2% this year, dropping to 0.9%, below the target band, in the September quarter, according to the RBNZ's December forecast.

ANZ National Bank economists said "it will not be a close call today for the RBNZ," in their morning report, released before the announcement. "No change to either the cash rate or the underlying tone of the statement released is likely."

The kiwi dollar traded at 70.44 U.S. cents, from 70.54 cents immediately before the statement was released.Traders expect the central bank will lift interest rates by 172 basis points over the coming 12 months, according to the Overnight Index Swap curve. That's down from 200 points before the CPI data was released. Australia's CPI rose 0.5% over the same period, and analysts predict the Reserve Bank of Australia will hike its benchmark interest rate for the fourth time in a row as soon as next week.

Bollard brought forward his timing on rate hikes last month, saying he may move "around the middle of 2010," as opposed to his previous indication that any increase would be in the second half of the year.

The change in stance was "encouraging" for ratings agency Moody's Investors Service, which yesterday noted improving economic conditions in New Zealand as one of the reasons why it raised its outlook on the country's banking sector to ‘stable' from ‘negative.'

Economic growth in China, Australia and emerging Asian nations underpinned gains in New Zealand's commodity prices, though Bollard said sustained growth wasn't assured with "overall activity still reliant on policy support" amid ongoing problems in financial sectors.

A muted holiday shopping period will also give the central bank heart that the economy is far from overheating, with electronic card spending flat in December, and credit card billings fell 0.2% from November.

"Policy stimulus and improving export earnings have seen a pick-up in household spending," he said. "That said, households remain cautious, with credit growth subdued."The residential property market, which was a source of wealth during the housing boom, has posted weak sales volumes while prices have risen.

The median sales prices rose 1.4% to $340,000, even as sales fell to a "concerning" level below 5,000, according to Real Estate Institute data. Still, consumers have begun this year with a spring in their step.

The ANZ Roy Morgan Consumer Confidence survey showed more optimism about the current state of economy. A net 22% of the 2,049 respondents said now was a good time to buy major household items, compared to a net 11% a month earlier.

In the U.S., the Federal Open Market Committee kept its benchmark interest rate at an extraordinarily low level of between zero and 2.5%. It reiterated that interest rates will remain subdued for an extended period.

Comments from our readers

No comments yet