Alan Bollard's 'ditto statement' put under microscope

Reserve Bank governor Dr Alan Bollard Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard left the official cash rate unchanged at 3 per cent yesterday, explaining the decision in terms which largely repeated his statement last month.

Some domestic data had turned out weaker than the bank had expected then, he said - a comment economists took as referring to June quarter gross domestic product, which was much weaker than the bank, or other forecasters, had picked.

But the outlook for the economy remained broadly in line with that assumed at the time of the September monetary policy statement, Bollard said.

"Continued household caution has seen consumer spending and housing market activity remain muted, and many firms have become less optimistic about their future prospects.

"However, continued high export prices, along with reconstruction and repairs in Canterbury, will support activity over the coming year."

On the international front, the Reserve Bank continues to contrast the position of most Western economies, where recovery is inhibited by debt, with strong growth in China, Australia and emerging economies of Asia.

The bank remains confident that demand is subdued sufficiently for the GST-driven spike in inflation to have only a "limited" impact on inflation expectations in the medium term.

The reference to firms becoming less optimistic certainly fits the most recent NZIER quarterly survey of business opinion, which was distinctly downbeat, but this month's National Bank survey recorded a rebound in sentiment, not only about the economic environment but about firms' own prospects.

"This may well signal a turning point in this regard," said National Bank chief economist Cameron Bagrie.

He detects a slightly softer tone to the Reserve Bank's language yesterday, noting that last month it had talked about the economy's surplus capacity being "progressively" absorbed over the next few years, whereas this time the adverb was "gradually".

Such semantic nuances aside, the announcement was read as a "ditto statement" which left financial markets largely unmoved, apart from an increase of four basis points in one-year wholesale interest rates.

The market is now pricing in at least two, and more likely three, OCR rises over the coming year, according to Credit Suisse's swaps-based indicator.

Most market economists expect the Reserve Bank to remain on hold until March.

"For us the bigger question is how far rates will eventually need to rise, rather than the precise timing of the next hike," said Bank of New Zealand economist Doug Steel.

The BNZ sees stronger growth, and more inflation pressure, next year than the Reserve Bank does - enough to push the OCR to about 5 per cent by early 2012.

ASB chief economist Nick Tuffley also believes the Reserve Bank is too sanguine about the inflation outlook and expects to see an OCR of 4.5 per cent by this time next year.

Bagrie expects the OCR to reach 4.25 per cent by the end of next year and rise towards 5.25 per cent over 2012.

"This is modest by historical standards, but more aggressive than current market pricing."

High export commodity prices would eventually filter through the economy, Bagrie said.

"We are not saying the economy is set to boom, simply that conditions for improvement are in place."

Goldman Sachs economist Philip Borkin sees the OCR reaching 4 per cent by the end of next year and 5 per cent by mid-2012.

Concerns about the persistence of the coming spike in inflation are overblown, in Borkin's view, giving the Reserve Bank time to wait and watch for more concrete signs of renewed momentum in the domestic economy before raising rates.