Bollard recycles OCR statement

Alan Bollard remains nervous about the sustainablity of the recovery. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard, to no one's surprise, left the official cash rate unchanged at 2.5 per cent and reiterated December's guidance that he expects to start raising it "around the middle of 2010".

It was an environmentally friendly statement, ASB economist Jane Turner said, in that it recycled so much of the previous one in December.

Bollard referred to the economic growth evident in Australia, China and emerging Asia, which accounts for almost half of New Zealand's trade, and the positive impact that has on export commodity prices - at least in world price terms. On the dollar, he was silent.

But he remains nervous about the sustainability of recovery among other trading partners once extraordinary levels of monetary and fiscal support are unwound.

"Similarly, the New Zealand economy continues to recover. Policy stimulus and improving export earnings have seen a pickup in household spending. That said, households remain cautious, with credit growth subdued," he said.

And business spending remains weak.

Goldman Sachs JBWere economist Philip Borkin said the Reserve Bank was looking for evidence the economy could stand on its own feet once policy support was removed.

"In our view, we are not in that situation just yet, but will be watching credit growth and business investment and hiring for evidence of this."

ANZ National Bank economist Khoon Goh detected a firmer and more confident tone in some subtle shifts in the language, including a change to "we would expect to begin removing policy stimulus around the middle of 2010" from December's "conditions may support beginning to remove monetary stimulus around the middle of 2010".

ASB chief economist Nick Tuffley noted the reappearance of "comfort" in the bank's discussion of the inflation outlook: "Annual CPI inflation is ... expected to track comfortably within the [target] band over the medium term."

The bank was possibly more relaxed about the inflation outlook after the subdued December quarter out-turn, he said.

After going through the statement with a fine-toothed semantic comb, the markets left pricing almost unchanged. It still implies a 25 basis point increase in the OCR in late April and a peak of 5.25 per cent around the middle of next year.

Bollard did not let the opportunity pass to remind the Government as it works on the Budget that the more discipline it displays on the fiscal front the less work monetary policy will have to do - code for not having to raise interest rates as far.

UBS economist Robin Clements said fiscal policy and potential tax changes would have a bearing on where the peak rate in the coming tightening phase might be.

"But it would have little to do with the starting point and the fact that 'neutral', wherever it is, is a long way above the current 'emergency' rate."

Tuffley said a large wedge was likely to remain between the OCR and bank funding costs even after the OCR has risen to more normal levels. That suggested a peak OCR of 5 per cent would be sufficient to remove the stimulus short-term rates provided, he said.

The foreshadowed start to the OCR tightening "around the middle of 2010" is conditional on the economy continuing to behave as expected in the bank's December monetary policy statement.

Those forecasts have growth recovering to 3.6 per cent over the year ahead coming off a base cratered by a recession that saw output fall 3.3 per cent over five quarters.