Bollard holds rates steady, highlights inflation, growth risks

Reserve Bank governor Alan Bollard left interest rates unchanged although his comments about upside risks to inflation pushed the currency and wholesale interest rates up.

Thursday, March 6th 2008, 9:13AM

by Jenny Ruth

Bollard reiterated that his official cash rate (OCR), currently at 8.25%, "will need to remain at current levels for a significant time yet."

The New Zealand dollar jumped about half a US cent to 80.26 US cents and wholesale interest rates rose about three or four basis points across the board after the monetary policy statement was released.

Nick Tuffley, chief economist at ASB Bank, says some people in the market had been starting to price in rate cuts later this year which Bollard has made clear are unlikely.

While the central bank did highlight the risks that the economy will be weaker than previously expected, it will take some time for those risks to materialise, Tuffley says.

Robin Clements at UBS New Zealand, who is expecting the Reserve Bank to start cutting the OCR from about December, says "if the economy falls into a hole, that will be the driving force" that will start an easing cycle.

While holding fire on predicting rate cuts, the Reserve Bank didn't signal any need to lift the OCR further.

Craig Ebert at Bank of New Zealand says that while the Reserve Bank is acknowledging the downside risks, "it is also recognising that the current situation is inflationary and that credit issues have effectively tightened policy anyway.

"It's sensible for the OCR to hold steady for as far as they can see," Ebert says.

The statement noted that the global credit crisis has raised bank funding costs that that anecdotal evidence suggests a tightening of credit terms to both households and businesses.

"With real house prices still substantially overvalued according to most metrics, further pressure on the price and availability of credit would add to the potential for a more marked housing market correction," the statement said.

Brendan O'Donovan, chief economist at Westpac, says that the rise in fixed term mortgage rates of between 30 and 70 basis points in recent weeks has meant that his bank is no longer forecasting a need to lift the OCR. "The move in retail rates we were calling for has already happened."

« The official cash rate (OCR) will remain unchanged at 8.25%.

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