Bollard leaves cash rate alone

By Brian Fallow

Moderate growth outlook of 2 to 3 per cent tipped over the next three years

Reserve Bank Governor Dr Alan Bollard acknowledges a high New Zealand dollar is undermining export earnings. Photo / Mark Mitchell
Reserve Bank Governor Dr Alan Bollard acknowledges a high New Zealand dollar is undermining export earnings. Photo / Mark Mitchell

The Reserve Bank has left the official cash rate at 2.5 per cent and signalled that it expects to leave it there for at least another year - six months longer that it thought three months ago.

But the flipside of the low-for-longer outlook for interest rates is a higher track for the dollar, around 5 per cent higher than it expected in June. Governor Alan Bollard's last monetary policy statement was an "on the one hand, but on the other" affair.

The fillip to growth from the rebuilding of Christchurch, which it expects to get going in a major way next year, roughly offsets the extent to which the Government's fiscal policy will be subtracting from demand and growth.

It sees a stronger outlook for private consumption over the next couple of years than it did three months ago offset by a more sombre international outlook.

The net effect is a moderate growth outlook ranging between 2 and 3 per cent over the next three years.

With that comes a benign inflation outlook, wobbling around the middle of the bank's 1 to 3 per cent target band.

The bank acknowledges a high dollar is undermining export earnings and is especially tough on firms competing with imports.

So when Bollard appeared before Parliament's finance and expenditure select committee Greens co-leader Russel Norman pressed him on why he would not cut the OCR to reduce pressure on the dollar.

Bollard responded that the bank does not see the mechanical connection its critics do between the official cash rate and the exchange rate.

If the financial markets saw an OCR cut as merely a ploy to lower the dollar, and not one that was credible because it was a response to a softer economy, they would anticipate the rate cut would have to be reversed and perversely see it as a signal to buy the kiwi dollar.

At times interest rate differentials were relevant as an influence on the exchange rate, he said. But now it was being moved around by events overseas - like what the German Constitutional Court had just decided, what the US Federal Reserve would do overnight, the Dutch elections, the upcoming European summit - and by the monetary policy actions being taken by major central banks.

Bollard added that while he was criticised by some manufacturers over the exchange rate, he was criticised in other quarters for missing an incipient housing boom in Auckland. "We don't agree with that either."

The bank's forecasts are sanguine about the outlook for house price inflation, despite mortgage rates at multi-decade lows. It sees house price rises nationwide peaking at just over 5 per cent in March next year before fading back to zero over the following two years.

But Bank of New Zealand head of research Stephen Toplis said: "We think that the housing market will prove to be much stronger than the bank expects as supply-side constraints result in much higher prices."

And ASB chief economist Nick Tuffley thinks the Reserve Bank is downplaying the wealth effects from the recovery in house prices, particularly in Auckland.

Governor's memorable quotes

Monetary Policy Statements can be dry affairs but Alan Bollard has never minced words or missed the opportunity to inject some dry humour. Here are some memorable lines from the past few years.

* "We're in the worst event since the 1930s".

* Asked if is there is any cause for optimism: "We are seeing a slow down in the rate of new bad news".

* Asked to clarify typically subtle change in wording from the previous statement:

"Luckily this room is full of media experts ... Some you even have English degrees so I'm confident that you're going to be able to interpret that one yourself".

* Asked to predict who would win the Rugby World Cup: "The final score is NZ 23.9, Australia 15.6".

* Asked if the crisis in Europe was keeping him awake at night:

"I don't stay awake at night, partly because I have other people employed to stay awake on my behalf. It has just been a disappointing recovery."

- NZ Herald

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