New RB Governor's do nothing decision likely to be repeated

By NZPA

Wednesday 2nd October 2002

Those looking for sweeping change from new Reserve Bank Governor Alan Bollard would have been disappointed when, in his first major decision today, he left rates unchanged.

He said that in view of the change in the Policy Targets Agreement (PTA) to focus on the medium-term, there was no urgency to adjust rates.

Economists predict rates could be left unchanged for up to a year.

Dr Bollard left the Official Cash Rate (OCR) at 5.75 percent citing stronger than expected growth in the New Zealand economy countered by a world recovery that was taking longer than expected.

Despite the higher than forecast growth in the first half of this year, Dr Bollard said inflation "still appears likely to edge downwards over the next year or so". "Given this, the bank sees no urgency to adjust interest rates at this time."

Economists said a war in Iraq, further stutters in the global recovery or even a more rapid global recovery could alter the picture on rates, but generally the forecast was very settled.

"The bank's statement leaves us comfortable with out central view that the OCR will remain on hold for the next 12 months," said Deutsche Bank senior economist Darren Gibbs.

Australia's Reserve Bank today left its official rate at 4.75 percent.

There was much interest in the statement's tone following Dr Bollard's appointment and the change in the inflation target to 1-3 percent from 0-3, and the emphasis on the medium-term outlook.

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

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

WestpacTrust chief economist Adrian Orr said it looked like mortgage rates had peaked 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 today.

The former Treasury Secretary 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 quit for politics 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 unsustainable without creating unacceptable inflation pressures and has hosed 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.

Dr Bollard's input to monetary policy is likely to be clearer in the next cash rate review on November 20 when the bank's quarterly Monetary Policy Statement is released.

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