Bollard's first move inscrutable

By BRIAN FALLOW

Reserve Bank Governor Alan Bollard struck a painstakingly neutral tone in his first interest-rate review yesterday.

The decision to leave the official cash rate unchanged at 5.75 per cent surprised no one, but the announcement was pored over, in vain, for signs of a bias towards easing or tightening.

Though the domestic economy has proved stronger than the bank expected in August, the performance and outlook for New Zealand's trading partners has disappointed.

The economy expanded 1.7 per cent in the June quarter. That was "a little stronger" than the bank had expected, Bollard said.

But at the same time "recent developments in financial markets" - euphemism for the continuing carnage in world sharemarkets - suggested that a sustained recovery overseas could take longer than previously thought, dampening New Zealand's growth outlook.

The net effect: "Inflation still appears likely to edge downwards over the next year or so."

The bank's August monetary policy statement had pencilled in some further increase in interest rates in the first half of next year, but added that it was "not urgent or at all certain".

In yesterday's announcement, Bollard said: "The focus of monetary policy is now on keeping inflation securely within the range mandated in the policy targets agreement [1 to 3 per cent] on average over the medium term.

"Given this, the bank sees no urgency to adjust interest rates at this time."

The stern word "securely" seems intended to keep the business community's inflation expectations anchored, lest the move to an explicit medium-term policy horizon be taken as an indication that the bank is going soft on inflation.

"This should assist in ensuring that we also avoid unnecessary instability in output, interest rates and the exchange rate, and that economic growth prospects are maximised," Bollard said.

Stephen Toplis, the Bank of New Zealand's head of market economics, said all that meant was, "Why move rates now when we haven't got a strong enough view about which way they should go? Moreover, we don't want to lower rates today and find ourselves having to reverse that move tomorrow, or vice versa."

It did not represent a shift in the Reserve Bank's policy but only to the challenge of persuading the wider community that it really was a gentler, Australian-style central bank, Toplis said.

The reference to avoiding unnecessary instability in growth, interest rates and the exchange rate was straight out of the 1999 policy targets agreement, reiterated in the one just signed by Bollard and Finance Minister Michael Cullen.

"To see this as evidence of Bollard being Cullen's puppet could not be further from the truth," said Toplis.

"The bank has always said that controlling inflation is the best contribution it could make to maximising long-term growth."

In a Reuters poll of 12 banks and brokerages yesterday, five expected Bollard's next move will be to raise rates.

The Reserve Bank of Australia held its key interest rate at 4.75 per cent this week.