Bollard hikes rates but gives no future guidance

Reserve Bank governor Alan Bollard has raised interest rates but has given no indication as to whether further rate hikes will be needed, which is being interpreted as on the dovish side.

Thursday, April 26th 2007, 9:51AM

by Jenny Ruth

Bollard raised his official cash rate (OCR) from 7.5% to 7.75%, citing the resurgence in economic activity since late last year, the buoyant housing market, increased government spending, rising terms of trade, net immigration gains and the robust labour market.

That's the second time this year he has raised the OCR.

To try to minimise the rate hike's impact on the already lofty New Zealand dollar, Bollard said the current "is now at levels that are both exceptional by historical standards and unjustified on the basis of medium-term fundamentals."

"He couldn't have sent a stronger signal to the currency," says Brendan O'Donovan, chief economist at Westpac. Within half an hour of the hike, the currency was little changed, as were wholesale interest rates.

By failing to provide future guidance, Bollard "is suggesting he doesn't want to have to hike again," O'Donovan says.

Nevertheless, that will depend very much on economic data and if the housing market doesn't calm down, Bollard will be forced to hike again, he says.

Cameron Bagrie, chief economist at ANZ/National Bank, says the recent run of data has all shown a very strong economy and so Bollard "was backed into a corner."

With both the currency and wholesale interest rates having risen sharply in recent weeks, monetary policy conditions are now very tight, Bagrie says. "This economy will roll over and I guess he doesn't want to send it over the edge."

But the lack of guidance on future rate moves "will leave the market really grasping as to what's going on and it's back to watching the data."

« Term deposits still seen as a safe haven

Sovereign takes regulation bull by the horns »

Special Offers