Bollard holds OCR steady as US Fed prompts currency jump

Reserve Bank governor Alan Bollard's well-anticipated decision to hold rates steady was over-shadowed by the US Federal Reserve's statement it intends to keep interest rates at historic lows into 2015, much longer than previously indicated.

Thursday, January 26th 2012, 11:23AM

by Jenny Ruth

The Fed's statement, rather than Bollard's, pushed the already high New Zealand dollar up more than half a US cent, a development Bollard is unlikely to be pleased with since his statement mentioned the high currency reducing exporters' returns.

Bollard left his official cash rate (OCR) unchanged at its historic low of 2.5%, citing ongoing impacts of the European debt crisis, modest domestic growth and benign inflation.

"The only change (in Bollard's stance) that's meaningful is dropping of the words "for now," says Robin Clements at UBS New Zealand. Today, Bollard said: "It remains prudent to keep the OCR on hold" and omitted the "for now" included in his last statement in December.

Dropping the qualification indicates a much more open-ended period before the OCR starts rising again, Clements says.

Peter Cavanaugh at Bancorp Treasury Services says the Fed's statement prompted a rally in US Treasury bonds which is likely to flow though into New Zealand wholesale interest rate markets.

However, Bollard also gave likely pressure on bank funding costs resulting from the European debt crisis as one factor in holding interest rates steady.

"Don't expect any fall in (New Zealand) swap rates to be matched by falls in mortgage rates because banks will be facing higher funding costs," Cavanaugh says.

Bollard is still concerned the Christchurch rebuild will lead to capacity constraints and create inflation pressures, "However, the commencement of that process appears to have been constantly put back. There's a strong argument, even without further aftershocks, the rebuild won't begin in earnest until 2013," Cavanaugh says.

Doug Steel at Bank of New Zealand says the OCR is very much on hold for now and otherwise Bollard's statement gave "very little for the market to chew on."

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