New RB Governor's 'dovish' stance points to lower rates

By NZPA

Wednesday 2nd October 2002

New Reserve Bank Governor Alan Bollard made his first major decision today -- to leave interest rates unchanged.

However, the dovish (accommodating) tone of his statement points to lower interest rates early next year, economists said.

He left the Official Cash Rate (OCR) at 5.75 percent, citing stronger than expected growth in the New Zealand economy matched against a world recovery that was taking longer than expected.

Dr Bollard said that given the change in Policy Targets Agreement (PTA) to focus on the medium-term there was no urgency to adjust rates.

The decision was no surprise to economists or markets but there was much interest in the statement's tone after the PTA was changed last month.

Dr Bollard said inflation "still appears likely to edge downwards over the next year or so", adding that the focus of monetary policy was now on keeping inflation "securely within the range managed in the Policy Targets Agreement over the medium term".

"Given this, the bank sees no urgency to adjust interest rates at this time."

The phrase "over the medium term" was one of the key changes made to the PTA along with the change in the inflation target to 1-3 percent from 0-3 percent.

Dr Bollard has not precisely defined the phrase but economists believe it has given the bank flexibility to allow inflation to run outside the target for considerable periods.

He reiterated today the medium term focus should assist in ensuring unnecessary instability in output, interest rates and the exchange rate and that economic growth prospects were maximised.

WestpacTrust chief economist Adrian Orr said it looked like mortgage rates were likely to peak around current levels of 6.9-7.85 percent.

"It's looking increasingly likely that we are staring at the peak of the OCR. They have backed off their global growth story, not surprisingly given the global economy is struggling to get back on its feet," he said.

"They also seem increasingly confident that inflation pressures will abate on their own which is interesting given that domestic growth has, if anything, been stronger than expected.

"The tone of the statement was pretty conciliatory -- pretty dovish," said Mr Orr.

Wholesale interest rates had already declined sharply in anticipation but Mr Orr said today's statement pointed towards a cut in rates in the first quarter of next year "so there might be some decline in wholesale interest rates".

Ninety-day bank bills were unchanged at 5.89 percent shortly after the statement.

Dr Bollard is only the second bank governor since the bank was given operational independence in 1989. His predecessor, Don Brash, was in the job for 14 years but gave up before this year's election and is now the National Party spokesman on finance.

Dr Bollard said the New Zealand economy had shown solid growth over the past year with both domestic and export activity proving robust.

Gross domestic product grew 3.5 percent in the June year following a June quarter spurt of 1.7 percent, well ahead of economists' forecasts of 1.1 percent.

The RB has previously deemed growth above 3 percent is unsustainable without creating unacceptable inflation pressures and has dampened it down by raising interest rates.

Dr Bollard said the growth of New Zealand's trading partners had continued to track at relatively modest levels and, while anticipated by the RB, "recent development in financial markets suggest that any sustained recovery offshore could take longer to occur than previously thought".

"The soft international backdrop is expected to dampen New Zealand's growth outlook over the coming year," Dr Bollard said.

The next cash rate review is on November 20 when the bank's November quarter Monetary Policy Statement is released. That is likely to have a firmer imprint of Dr Bollard's input in it.

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