Bollard delivers early Christmas present to the housing market

Thursday, October 26th 2006, 11:40AM

by Jenny Ruth

Reserve Bank governor Alan Bollard opted to hold interest rates steady, prompting a sharp fall in wholesale interest rates and the New Zealand dollar.

"He's given a Christmas present to the housing market," says Westpac chief economist Brendan O'Donovan. "Today's statement will see fixed rate mortgages down significantly."

A slim majority of economists had expected Bollard to raise the official cash rate (OCR) from 7.25% to 7.5%, although all thought the decision was finely balanced so a strong market reaction had been expected either way. Bollard still left the door open to a rate hike down the track.

Within half an hour of the statement, the one-year swap rate was down about 16 basis points, the two-year was down about 11 points and the three-year was down 17 points. The currency had fallen from 66.05 US cents before the statement to 65.55 cents.

Bollard noted "a significant improvement to the near-term inflation outlook" as oil prices fell. Annual inflation dropped from 4% in the year ended June to 3.5% in the year ended September.

He still emphasised that the housing market remains resilient "supported by net inward migration and ongoing mortgage credit expansion at low interest margins.

"In the past month we've seen the appetite of the banks to compete hard for this (mortgage) maturity spike. We expect that to continue," O'Donovan says. Craig Ebert at Bank of New Zealand, which had picked no change to the OCR, says medium term inflation pressures remain significant and the chance of a rate hike remains a real possibility which should limit the rally in the wholesale debt market. "The Reserve Bank won't want a big fall in fixed rate mortgages." Whether Bollard does lift rates will depend on the data flow and the next big figures will be the labour market data in early November. "They can only confirm that the labour market is still pretty tight," Ebert says. However, after a surprisingly big jump in employment in the June quarter, they could conceivably show a technical correction in the September quarter, he says.

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