Bollard keeps rates unchanged and softens easing bias

Reserve Bank governor Alan Bollard left interest rates unchanged, as widely expected, and softened his bias towards easing further.

Thursday, September 10th 2009, 9:58AM

by Jenny Ruth

Bollard left his official cash rate (OCR) unchanged at 2.5% and said he continues to expect to keep it "at or below the current level through until the latter part of 2010."

However, he didn't reiterate his July statement that "the OCR could still move modestly lower over the coming quarters."

The easing bias "is still there in a mild form. They've done it that way to try to temper the market response," says Westpac chief economist Brendan O'Donovan. "They're hammering the message that effectively rates will remain at these levels until the latter part of next year."

Market reaction was relatively muted with the currency broadly unchanged while longer-term wholesale interest rates crept up about three basis points.

While higher dairy prices have alleviated the central bank's concern about the high currency, it is still worried about it, and a possible surge in the housing market, could undermine the economic recovery, O'Donovan says.

Nick Tuffley, chief economist at ASB Bank, which was the only bank forecasting an OCR cut today, says it's pretty clear now there isn't going to be another easing.

"There was quite an effort in July to be as down-beat as possible. They've obviously given up on trying to talk the market down - it evidently wasn't working."

Despite Bollard saying the OCR will stay at current levels until the end of 20-10, "I don't think anybody seriously thinks they will wait that long," Tuffley says. "We're maybe looking around the middle of the year."

Chris Green at First NZ Capital says Bollard is "trying to play a very straight bat and trying to keep expectations of interest rates being unchanged for as long as possible."

Green says while Bollard changed his rhetoric slightly, he was surprised the central bank didn't change its economic view more.

"When I read the policy statement, it's got quite a down-beat tone to it. There's an obvious attempt to highlight things on the less positive side of the ledger."

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