Bollard likely to raise interest rates sooner

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Reserve Bank governor Alan Bollard is likely to raise interest rates sooner than previously signaled, having become more comfortable the economy is recovering and becoming more concerned about the inflation outlook.

Thursday, June 9th 2011, 9:49AM 4 Comments

by Jenny Ruth

As expected, Bollard kept his official cash rate (OCR) at its 2.5% record low, but rather than saying it will stay there "for some time,"

as he was saying in April, he is now saying it will stay there "for now"

and says it will rise gradually over the next two years.

Wholesale markets reacted strongly, the currently rising nearly a US cent and the two-year swap rate, from which two-year fixed rate mortgages are priced, rising 10 basis points.

Westpac chief economist Dominick Stephens says Bollard's statement was "particularly hawkish. The Reserve Bank is certainly signaling an OCR rise this year and a steeper series of hikes next year than previously."

While Bollard is still assuming households will continue to focus on repaying debt which will constrain consumption and house prices and higher inflation expectations will prove temporary, "the risk is both (consumption and inflation) will be stronger."

Stephens is now expecting the first OCR rise will come in December this year compared with his previous January expectation.

Craig Ebert at Bank of New Zealand, who had thought Bollard's previous outlook had been too dovish, says "we thought it was a very sensible, reasonable statement. It's moved in the right direction and it's acknowledging the recovery's still in place and it will start to create some inflation pressures down the track."

Nick Tuffley, chief economist at ASB Bank, says he's now expecting the first OCR rise will come in January next year compared with his previous March pick, largely because he suspects the Christchurch reconstruction effort will take a little longer to get underway than Bollard currently expects. "We're not convinced it will be that swift."

Tuffley says while Bollard is still talking about households being constrained by repaying debt, the Reserve Bank's consumption forecasts have increased from looking unrealistically low to something more likely.

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