Dollar, rates jump after Bollard leaves rates unchanged

Interest rates jumped and the New Zealand dollar soared after Reserve Bank governor Alan Bollard left interest rates unchanged, even though his statement emphasised the economic risks remain weighted to the downside and the high currency is "unhelpful."

Thursday, June 11th 2009, 10:08AM

by Jenny Ruth

Bollard left his official cash rate (OCR) unchanged at 2.5%, the first time he has reviewed it and left it unchanged since July last year when the OCR stood at 8.25%.

Wholesale interest rates were up about 10 basis points across the board half an hour after the statement while the currency jumped about half a US cent, effectively tightening monetary conditions.

Nick Tuffley, chief economist at ASB Bank, who had been one of five out of 12 economists picking no change in the OCR, says the high exchange rate "is a very key risk. The issue for them is you can't really look at New Zealand's fundamentals in isolation. While external balances suggest our currency should be lower for a sustained period, that doesn't necessarily mean that will happen."

Robin Clements at UBS New Zealand, which had been picking a 25 basis point cut, says the only headline coming out after the statement which was inconsistent was the one which said "unchanged."

The thrust of Bollard's statement was he had already cut substantially and we should wait for that to take effect.

"Given the recognition of the risks and the way the market's been behaving and was likely to behave if they paused, it was a bit of a risk not to make a cut, even a small one," Clements says.

"While it may not have done much, it would have avoided what we've got, which is tighter conditions."

Annette Beacher at TD Securities, who was one of two economists arguing a 50 point cut would have been appropriate, says we may be seeing a repeat of what happened after Bollard's March statement which had been a little more upbeat than the market had expected.

"They seem to have found a few green shoots here and there but still concluded that the risks are on the downside and the strong dollar is delaying the recovery."

Bollard noted signs of the global economy stabilising and financial conditions improving and he expects New Zealand's economy to begin growing again towards the end of this year but the recovery is likely to be slow and fragile and unemployment is likely to keep deteriorating well into 2010.

Tags: OCR