Reserve Bank Governor Alan Bollard has kept the official cash rate unchanged at a record low 2.5 per cent, as expected, and dropped wording in his statement that rates could fall further, stoking speculation borrowing costs will rise sooner as the economy recovers.
"There are welcome signs that economic activity is growing again," Bollard said a statement released in Wellington today. Still, "there remain significant vulnerabilities and challenges to be worked through" globally which could drag on New Zealand's economy.
He dropped the wording of the past few statements that interest rates will remain "at or below" current levels until late next year, saying there was "no urgency to begin withdrawing monetary policy stimulus and we expect to keep the OCR at the current level until the second half of 2010."
Bollard has to chart a careful course on the timing of interest rate increases. The economy climbed out of recession in the second quarter, business and consumer confidence is rebounding and house prices picking up.
On top of that, inflation unexpectedly accelerated in the third quarter. Still, risks remain, including a jobless rate forecast to top 7 per cent next year and Bollard wants to avoid fanning speculation for early rate increases, which would drive up the kiwi dollar and crimp export growth.
"It's all about managing expectations," said Craig Ebert, market economist at Bank of New Zealand, before the statement was released. The RBNZ has to acknowledge the OCR can't stay low until the end of 2010, "not with firmer signs of economic recovery coming through," he said. At the same time, it has to "douse expectations of a tightening cycle beginning in earnest early next year."
Before today's statement, traders had been betting the central bank would hike the OCR by 2.35 percentage points in the next 12 months, based on the 'Overnight Index Swap' curve.
Jason Wong, head of investment strategy at AMP Capital Investors, told reporters last week that Bollard would have to soften his rhetoric before he could credibly begin boosting interest rates. Wong predicts the OCR will be hiked in March next year.
Bollard repeated his concern over the level of the kiwi, which he said "has limited the scope for exports to contribute to the recovery and reinforces a bias towards domestic expenditure."
The trade-weighted index of the New Zealand dollar, the central bank's preferred measure of the currency, has climbed about 32 per cent from its lows in March.
ASB economist Jane Turner said today's Reserve Bank statement was
"deliberately dovish, designed to try hose down market expectations of rate hikes."
This statement suggested the Reserve Bank was "not very happy about the market's position" and much of the statement was crafted to reign in market expectations.
The Reserve Bank had "rather carefully side stepped discussing the recent improvement" in economic indicators, said Turner.
She said the bank continued to note the high value of the New Zealand dollar. "It is likely to still be of the view that the NZ dollar will correct over the medium term as the global economy focuses on NZ's high level of indebtedness," said Turner.
Despite today's statement, Turner said she still expected the Reserve Bank to start lifting the OCR earlier than it was suggesting - with a 50bp hike in April.
"The statement is also a little contradictory, in saying rates will remain low until the second half of next year yet expressing concern that credit growth might trigger stronger domestic spending. In other words, the RBNZ is saying it intends to keep interest rates low but doesn't want anyone to borrow more money," she said.
"We expect that the ongoing recovery in the domestic economy will trigger an earlier start to OCR increases than today's statement suggests," said Turner.
Exporters, including farming groups, this week urged Bollard to cut rates further to weaken the currency. Still, it's below the level where the central bank was forced to intervene in forex markets in 2006, and Bollard told parliamentarians at a select committee last week that the high dollar wasn't an impediment to boosting rates in the future.
The kiwi fell to 72.12 US cents from 72.81 cents immediately before the statement as some traders had been betting on a more hawkish statement.
- BUSINESSWIRE / NZ HERALD STAFF
See the Reserve Bank announcement here
