New Reserve Bank governor leaves rates unchanged

As expected, the Reserve Bank left its official cash rate unchanged at 5.75%, citing its new target of trying to keep inflation under control over the medium term.

Wednesday, October 2nd 2002, 11:18AM

by Jenny Ruth

As expected, the Reserve Bank left its official cash rate unchanged at 5.75%, citing its new target of trying to keep inflation under control over the medium term.

"Given this, the bank sees no urgency to adjust interest rates at this time," says Alan Bollard in his first statement as governor.

He cited a stronger than expected New Zealand economy but a weaker than expected global outlook.

Given the statement met near unanimous expectations, wholesale interest rates markets were unmoved after the statement, ensuring mortgage rates are likely to remain at current levels.

"That’s the way it should be. Central banks aren’t really supposed to deliver surprises," says Stephen Toplis, head of market economics at Bank of New Zealand.

Reaffirming the new policy targets agreement, which requires Bollard to keep average inflation between 1% and 3%, "was as much a marketing ploy as anything else," reminding Finance Minister Michael Cullen and the public of the regime change. The previous target required the bank to keep inflation more rigorously between zero and 3%.

Bollard says the New Zealand economy has shown solid growth over the past year with both domestic and export activity remaining robust and growth in the June quarter was "a little" stronger than the bank had expected.

The economy expanded 1.7% in the quarter against economists’ expectations of 1.1%. Annualised, that’s almost 7% growth.

Bollard says in contrast, our major trading partners’ growth "has continued to track at relatively modest levels."

While that was anticipated to some extent in the last monetary policy statement, "recent developments 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," he says.

On balance, the overall outlook is broadly in line with expectations, Bollard says.

"Inflation still appears likely to edge downwards over the next year or so."

Leaving interest rates steady "should assist in ensuring that we also avoid unnecessary instability in output, interest rates and the exchange rate and that economic growth prospects are maximised, given our current outlook," Bollard says.

« OCR unchanged

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