Bernard Hickey. Photo / Daily Post, Rotorua
Reserve Bank Governor Alan Bollard has given himself some wiggle room to increase the Official Cash Rate earlier than his previous indications. That is a good thing because it's likely he'll need it.
Bollard has reassured home owners this year that he would not increase the OCR from
its record low of 2.5 per cent until the second half of 2010. Not surprisingly, home buyers have taken the invitation to go out and buy houses with 'cheap' interest rates near 6 per cent.
This, inevitably, has sparked another surge in housing market activity to the point now the Reserve Bank is forecasting annual house price inflation of 12 per cent by the March quarter of this year. Yet Bollard is saying that this time it is different.
The surge in house prices will not lead to a surge in consumer spending because, he says, home owners are being more careful this time and appear to keep their repayments up and in some cases trading down to reduce debt.
Bollard is also saying he doesn't need to raise the OCR yet because he is getting help from higher long term market interest rates, a higher New Zealand dollar and the prospect of a tightening of government spending.
He is essentially saying that he can keep the OCR at a record low of 2.5 per cent despite house prices rising 12 per cent because someone else will do the work for him of controlling inflation.
That's a heroic set of assumptions. Let's hope he is right. If not, we face slipping deeper into an unsustainable cycle of consumer spending fed by foreign debt that eventually forces us to pay higher interest rates and accept lower economic growth for longer.
Let's face it. Alan Bollard is a dove and just can't stand raising interest rates. He has given himself wiggle room today, but really needed to signal rate hikes in early 2010 to be sure that inflation doesn't spark up again.
The most ominous line in the monetary policy statement is that non-tradeable inflation (the stuff generated domestically by businesses) is rising again back to its long term average of 3 per cent.
Alan Bollard seems relaxed about that. I'm not.
- INTEREST.CO.NZ
