Bollard to leave rates unchanged this week

Reserve Bank governor Alan Bollard is universally expected to leave interest rates unchanged but he may be concerned the market has already priced in several rate hikes during the first half of 2010.

Sunday, July 26th 2009, 11:45PM

by Jenny Ruth

All 12 economists surveyed by www.goodreturns.co.nz expect Bollard to leave the official cash rate (OCR) unchanged at 2.5%.

Driving expectations are continued "green shoots" signs the global economy is stabilising and expectations the domestic economy is coming out of recession, a belief partly fuelled by Bollard himself in a speech on July 14.

"The market may be getting over-excited about rate hikes," says Craig Ebert, an economist at Bank of New Zealand.

Indeed, Jane Turner, an economist at ASB Bank also warns the strong New Zealand dollar is undermining the economic outlook which may force Bollard to cut rates further, a prospect most other economists have largely ruled out.

Annette Beacher at TD Securities agrees: "The pressure will be on to voice a very dovish tone, listing key headwinds to recovery to scale back such overly aggressive market pricing/expectations for tightening.
Otherwise, Bollard risks reinforcing market expectations, "risking choking off the recovery that hasn't even really begun," Beacher says.

At the other end of the spectrum, Brendan O'Donovan at Westpac says Bollard is becoming more concerned about a return to debt-driven consumption as the economy recovers.

"Keeping interests too low for too long would obviously fuel that risk," O'Donovan says.

While Bollard is likely to reiterate previous statements that he expects to keep the OCR at or below current levels until late 2010, "if the pace of the global recovery continues to surprise the Reserve Bank in coming months, that expectation could soon become untenable."

Chris Green at First NZ Capital says while Bollard will want to give the impression rates will rise anytime soon, "he won't want to foster a belief that it's back to normal of loading up on debt and going on a spending spree."

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