Reserve Bank leaves rates unchanged and rules outs any cuts this year

As expected, Reserve Bank governor Alan Bollard left his official cash rate (OCR) unchanged and ruled out any rate cuts this year.The OCR is at 7.25% and was last moved from 7% in December.

Wednesday, April 26th 2006, 12:00AM

by The Landlord

"It was a classic case of when there’s a lot of noise, the best thing a central bank can do is nothing," says Stephen Toplis, an economist at Bank of New Zealand.

While Bollard acknowledged that economic growth has slowed more than he expected, he also said that the fall in the New Zealand dollar and surging oil prices have increased short term inflation pressures.

"These effects are expected to keep annual CPI inflation above 3% for longer than previously projected and risk putting upward pressure on inflation expectations," Bollard said.

Cameron Bagrie, chief economist at ANZ/National Bank, says the statement was hawkish but that he is encouraged by Bollard saying explicitly that he doesn’t expect to have to raise rates again this cycle.

"He’s prepared to look through the first round effects. The Reserve Bank is prepared to use the flexibility of the monetary policy framework," Bagrie says.

The danger had been that the currency and oil price shocks might have "scared the bejesus out of the Reserve Bank and that they started putting hikes back on the agenda," he says.

Brendan O’Donovan, chief economist at Westpac, says he has to take the statement at face value but that ruling out any rate cuts this year will lead to bad policy.

Waiting until it’s evident inflation is on the decline means "a good proportion of forward looking policy is cut off. That means it feed the economic cycle and it makes the booms bigger and the busts steeper," O’Donovan says.

He estimates there’s a lag of about two and a half years between currency changes and its effect on inflation.

By Jenny Ruth

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