Bollard sticks to his guns

By NZPA

Wednesday 19th March 2003

Reserve Bank Governor Alan Bollard today stuck to his guns, saying there was little scope for an early cut in interest rates despite the looming United States-led war with Iraq.

Speaking to Parliament's finance and expenditure select committee on the recent decision to keep New Zealand's Official Cash Rate steady at 5.75 percent, Dr Bollard said little had changed since the March 6 Monetary Policy Statement (MPS).

"There's been a lot of data since the statement and that's generally confirmed our view about the economy," he said.

There were few signs yet that New Zealand's strong growth -- fuelled by migration, a housing boom and solid consumer spending -- was slowing.

"Retail sales, wholesale trade, manufacturing sales were all consistent with the profile we had for growth," Dr Bollard said.

Retail sales rose about three times the pace expected by private sector analysts in January and manufacturing sales fell 0.9 percent in the fourth quarter.

A condition of lower interest rates was seeing solid evidence that domestic pressure on resources and a slowing domestic economy was feeding through to prices, he said.

The buoyant New Zealand dollar also didn't yet justify a cut, and while the export growth rate was expected to decline in the coming months as the effect of the rising kiwi hit home, not all of the gains recorded at the peak of the export boom would be erased, Dr Bollard said.

The kiwi was buying US54.82c late this afternoon against highs around US56.80c struck earlier in the month.

The bank expects the economy to begin to show signs of a slow-down by the March quarter and Dr Bollard today reiterated forecasts in the March MPS that the economy will grow 2.5 percent in the year to March 2004, slowing from 4.25 percent in the current year.

New Zealand has the highest central bank rate in the developed world. By contrast, in the United States the Federal Reserve today left its key rate unchanged at 1.25 percent -- its lowest level since 1961.

Economists are unanimous that the Governor won't cut rates at his April 24 review.

Dr Bollard said there was no evidence the Iraq war would impact negatively on New Zealand commodity prices.

"There is no reason to think that New Zealand commodity prices, as opposed to minerals or some other commodity, will be directly impacted."

Any decrease in investment in the tourism, housing or business sectors would likely be countered by New Zealand's reputation as a "safe haven" destination. Financial markets could also benefit from a quick resolution to the crisis -- a factor which has seen world share indices rally in recent days, he said.

One downside to the conflict was that it could provide a "smokescreen" for businesses -- encouraging them to release below par results in the hope they would be absorbed into the broader market malaise.

Dr Bollard brushed off a remark from former-governor-turned National party finance spokesman Don Brash that the bank's current inaction left it prone to the situation seen in the mid-1990s when it left interest rates too low for too long and let the economy over-heat.

The consequence of that mistake was that inflation rose above the bank's target band and it had to apply the brakes hard the following year by hiking interest rates aggressively.

"We are treading our way carefully through the data now to pick the turning point and get some clarity that inflation is running hot across a number of the domestic sectors," Dr Bollard said.

He said there were a number of differences between the situation now and in the mid-90s.

"There is not quite the same degree of activity in some parts of the property market that there was then. There is evidence that markets are working reasonably well in not building up bottlenecks and price pressures. Thirdly, now house prices don't directly impact on the CPI (Consumer Price Index) as they did then, which is an easier state of affairs to deal with.

"Will we be wrong in this? Well, we'll just work our way through and hope that we're not. It is quite a difficult time to be picking actually," Dr Bollard said.

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