Reserve Bank sees low rates as the norm

Alan Bollard's comments contained more positives than negatives. Photo / Mark Mitchell

The Reserve Bank sat tight at yesterday's review of the official cash rate, saying it was likely to be some time before it needed to adjust it from its all-time low of 2.5 per cent.

It expects inflation, currently 4.5 per cent, to settle "comfortably" within the 1 to 3 per cent target band once Government-driven increases (to GST, ACC levies, tobacco excise and the emissions trading scheme) drop out of the headline number.

"My sense is the Reserve Bank didn't want to disturb market pricing today," Deutsche Bank chief economist Darren Gibbs said.

"The market is thinking there is some chance of a move in December - not guaranteed - with a bias among the economist fraternity to think it will be after Christmas. The 'some time' language is consistent with that."

The balance of Governor Alan Bollard's comments was more upbeat than not.

He described the economic outlook as very uncertain after the February earthquake, acknowledged its adverse effects on firms and households in Christchurch, and described as "unwelcome" both high oil prices and the high dollar.

But on the positive side he referred to signs of recovery in confidence and consumer spending and said activity in the rest of the country seemed relatively unaffected by the quake, housing market turnover and business investment were beginning to increase, trading partner growth was robust, export prices higher, climatic conditions favourable and on-farm investment picking up.

"We were always going to get something more upbeat and forward-looking than in March," Gibbs said.

"Given the past, it's not hard to be more optimistic about the future."

But the bank would take the rebound in business confidence, evident in Wednesday's National Bank survey, with a bigger pinch of salt than it did last year.

"You would like to see signs consumer confidence is picking up. We have seen business confidence respond to the [March 10] rate cut, presumably on the basis of their impression of what consumers will do, but we haven't seen that pick-up in consumer confidence."

Westpac chief economist Dominick Stephens said Bollard had acknowledged the surprising resilience of the economy, outside Christchurch, in the face of the earthquake. "But crucially he has pointed out that there is not a lot of pressure on inflation. The bank can stick to the plan, as we understood it, from March and hold off on rate hikes until next year."

The economy was starting from a very subdued level of activity, operating well below its capacity, and could therefore accommodate a decent run of growth before reaching inflationary speed limits, Stephens said.

"The earthquake is still having a dampening effect on the economy. One day it will become a stimulus but we don't know when that day is, so why not hold off on hiking the OCR until we see that day occur. There is no reason to move before that."

ANZ chief economist Cameron Bagrie said the assumption that inflation would settle comfortably within the target band when the various one-offs fell out "seems rather heroic".

"On balance the Reserve Bank's view is that things have not been as bad as was feared in March, though it is far too early to be talking things up - partly for fear of igniting the currency further, we suspect."

The dollar initially fell half a cent to US80.3c, but subsequently reversed much of the fall as the US dollar lost ground across the board.

Short-term interest rates fell too, but are still consistent with a 60 per cent chance of the OCR hike by the end of the year.

BOLLARD'S LEDGER

Negative:
* Uncertain outlook.
* Christchurch quake affecting firms and households.
* High dollar and oil prices "unwelcome".

Positive:
* Signs of recovery in confidence and consumer spending.
* Housing market and business investment on the rise.
* Export prices higher.
* Favourable climate.
* On-farm investment picking up.