Bollard defends 2010 interest rate hikes

Photo / Natalie Slade

Reserve Bank Governor Alan Bollard defended his decision to hike the official cash rate twice last year after a string of weak data at the tail-end of 2010 drew criticism.

This morning he left the official cash rate (OCR) unchanged at 2.5 per cent, indicating New Zealand's surprisingly strong local economy remains largely at the mercy of developments in the troubled global economy and financial markets.

"If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase", Dr Bollard said in his September Monetary Policy Statement.

"For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 per cent."

Bollard said the decision to lift the OCR 25 basis points in June and again in July was appropriate due to the pick-up in underlying inflation, high inflation expectations and revisions to economic data showing the recovery was more robust than thought, in a break-out box in today's September monetary policy statement.

Some economists questioned his decision to hike last year, saying it was premature, especially given the near-double-dip recession through the middle of last year when economic growth stalled in the June quarter and contracted in September period.

Bollard also justified this year's 50 basis point cut in March, saying it was "aimed at helping offset the economic impacts of the Christchurch earthquake and to guard against the risk of the economy slowing sharply."

"Since then, economic activity has continued to expand, suggesting that the nationwide effects of the earthquake have been contained," he said.

In the July OCR review, Bollard indicated he saw "little need" to keep the extra stimulus from the March cut, though that was dependent on global markets settling down.

Because Europe's sovereign debt crisis and the faltering US economy have continued to stoke investor fears, he kept rates on hold at 2.5 per cent, and said he won't hike unless the global turmoil has a "mild impact" on the local economy.

The Reserve Bank today lifted its forecast cost of the Canterbury quakes to $20 billion, and said the total bill is still uncertain.

Last month, Finance Minister Bill English said the government faces a bill of some $7.1 billion from the quake, which will push this year's budget deficit out to $18 billion and wipe out the $6 billion National Disaster Fund.