Bollard leave rates unchanged citing uncertainty

Reserve Bank governor Alan Bollard left interest rates unchanged, saying that the outlook for economic activity and inflation has become more uncertain since the last rate review in July.

Thursday, September 13th 2007, 10:25AM

by Jenny Ruth

In leaving his official cash rate unchanged at 8.25%, Bollard highlighted the global credit concerns and the risk of a weaker US economy while also noting widespread inflation pressures.

The finance company collapses could act to further dampen activity in some areas of the economy but Bollard's current view is that such effects will be relatively contained.

Financial markets were little changed after the statement, making it unlikely there will be any resulting changes in mortgage rates, and economists are remarkably unanimous in their views of the statement.

"It was pretty neutral," says Nick Tuffley, chief economist at ASB Bank. While it's likely that Bollard will hold rates steady well into next year, "if we get a really nasty melt-down in the global economy, that's the scenario under which we might see rates come down."

Craig Ebert at Bank of New Zealand says the statement was "pretty even-handed" although it is clear that Bollard is "not entirely comfortable about the inflation outlook."

The central bank raised its expectations of where inflation will head in the near term back towards 3%. The bank is pledged to maintain inflation between zero and 3% over the medium term.

"The slowdown in housing is no more than what the bank expected," Ebert says. "If it rebounds later this year and into next year, and global issues blow over ... suddenly it's a very ugly inflation picture again."

Robin Clements at UBS New Zealand says Bollard has "taken the centre line, pretty well." The market had been expecting Bollard to provide clues as to which way he was leaning but he has "pretty much left it up in the air, that we will watch and wait, which I think is quite appropriate."

The global turmoil is adding further pressure to an economy showing signs of slowing but there are also inflationary consequences in the surge in dairy incomes, rising food prices, a falling exchange rate and rising petrol prices, Clements says.

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