Hawkish and dovish views of the OCR
In the BNZ Weekly Overview he looks at the Reserve Bank's decision last Thursday to leave the Official Cash Rate (OCR) at 2.5% with a rise to come in the middle of 2010.
Alexander says the Reserve Bank quite rightly noted that monetary policy at the moment is actually tighter than implied by the 2.5% OCR because of a higher exchange rate and much higher bank funding costs.
"This is seen most easily if one considers that a 2.5% cash rate would normally produce term deposit rates near 2.5% and not the 4.5% - 5.0% range commonly offered by banks now.
"In fact the Reserve Bank estimate that the cost of bank funding is now around 1.2% higher in aggregate than before the global crisis, implying the current 2.5% official cash rate is more like a 3.75% rate of old."
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