One rate rise today, more to come

Jenny Ruth

Thursday 29th July 2004

Reserve Bank governor Alan Bollard is promising more increases to come.

"Further tightening of monetary policy looks likely to be necessary," Bollard said after saying the buoyant economy is likely to be maintained for longer than he expected at his last statement in June, creating inflation pressures.

While the statement didn�t have much impact on 90-day bank bill rates, from which the banks price their floating mortgage rates, it pushed up longer-term rates. The one-year swap rate, from which the banks price their one-year fixed-rate mortgages, climbed from 6.47% late yesterday to 6.54%.

"You�re never going to get a black and white signal out of the Reserve Bank, but this is a fairly dark shade of grey indication that they will lift rates once again," says Nick Tuffley, an economist at Westpac Bank. "The statement seems to be fairly unequivocal about the likelihood of another increase."

Before the statement, the wholesale market had been convinced there would be a rate increase today but had been pricing in only about a 50% chance of a further increase, Tuffley says.

Bollard is accentuating the upside risks to inflation and downplaying the downside risks which include declining growth in immigration, the slowing housing market and the high exchange rate, he says.

Craig Ebert, an economist at Bank of New Zealand, says that while he doesn�t expect inflation to rise as much as the central bank does either, "the risks are all pointing one way and that�s up."

Back in June, Bollard made it clear that he was monitoring what is happening with wage setting, Ebert says. While the official statistics aren�t showing wage inflation as much of a problem at the moment, some anecdotal evidence is starting to come through, he says.

Comments from our readers

No comments yet