OCR stays at 3pc, future hikes 'more moderate'

Reserve Bank Governor Alan Bollard speaking at this morning's Monetary Policy Statement. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard held the official cash rate at 3 per cent, as expected, and said the track for future rate hikes will be "more moderate" than previous forecasts as the Christchurch earthquake disrupts an already slowing recovery.

"The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to do so for some time yet," Bollard said in a statement in Wellington today. "The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement."

Bollard reined in the expected track of rate hikes to a slower pace than in his March and June policy statements, shaving more than a percentage point from the 90-day bank bill forecast in the second half of 2011 onwards. Before the announcement, markets were pricing in 69 basis points of increases over the coming year, according to the Overnight Interest Swap curve.

"Given the OCR is only moved in discrete multiples of 25 basis points, several on-hold decisions are implied by this forecast," the September document said.

The kiwi dollar dropped to 72.75 US cents after the statement from 73.13 cents immediately before the Monetary Policy Statement was released.

ASB Bank economist Jane Turner described this morning's statement as "very dovish".

"The Reserve Bank was very explicit that the statement implied several on-hold decisions. The Reserve Bank is very comfortable with the inflation outlook and is in no hurry to lift interest rates in the here and now," said Turner.

"Importantly, the Reserve Bank has undertaken a major rethink on the household sector outlook, with forecasts for household spending and residential investment scaled back substantially."

"This Monetary Policy Statement has brought a huge shift in the Reserve Bank's view of the recovery - even before the impact of the earthquake starts getting taken into account," said Turner.

"Particularly, it has reinforced that the OCR is unlikely to climb substantially during the tightening cycle."

"Our view of a 4.5 per cent OCR peak is effectively where the Reserve Bank 's 90-day outlook implies the OCR will eventually end up - and we don't think this pre-earthquake view from the Reserve Bank will have changed."

Turner said it remained likely that the Reserve Bank would be on hold for the rest of the year, at least while the economic impact of the earthquake remained uncertain.

ANZ Bank economist Khoon Goh said that he expected "a resumption to the tightening cycle" from March next year, but that tightening cycle would be protracted and not "in a straight line".

"Indeed, the Reserve bank explicitly stated that "Given that the OCR is only moved in discrete multiples of 25 basis points, several on-hold decisions are implied by this forecast." We see the OCR ending 2011 at around 4.5per cent."

Goh said while this was more hawkish than market pricing but largely reflected his view that while the economic outlook and recovery was "certainly sedate and patchy", he expected momentum to "build nicely over 2011".

A more sedate 2010 - courtesy of people "de-leveraging" - paying off debt, was partially underpinning a more robust 2011, said Goh.

Though New Zealand's economy will have grown for six straight quarters at the end of September, the bank said "there are signs that growth is losing momentum."

The bank pared back its forecast on annual inflation from its previous statement, with a spike to 4.8 per cent in the June quarter next year, down from the 5.3 per cent forecast for September 2011 in the last MPS.

The Reserve Bank cut about half a percentage point from its forecast for inflation, with CPI tracking closer to the middle of the bank's 1 per cent to 3 per cent target band in the coming years, rather than near the top as previously predicted.



















Read the full Monetary Policy Statement here.

See recent changes to the OCR at the Reserve Bank's website here.

WITH HERALD ONLINE