Dollar falls as Bollard keeps OCR on hold

BUSINESSDESK Reserve Bank Governor Alan Bollard held the official cash rate at 2.5 percent today, and pushed out the track of future increases as the strong kiwi dollar keeps a lid on imported inflation pressure.

Bollard played down signs of life in the domestic economy, saying the strength of the New Zealand dollar was hindering the tradable sector, by limiting local manufacturers’ ability to compete with rival imports rather than eroding export earnings.

The central bank lowered the track of the 90-day bank bill rate, often seen as a proxy for the OCR, stripping out gradual increases this year. The bank sees the bill rate at 3.3 percent by the end of 2013, having previously forecast it to be 4 percent. At the same time he lowered the track of inflation, with the consumer price index now expected to be 1.4 percent in the third quarter, down from 2.3 percent in his previous forecast.

Westpac Banking chief economist Dominick Stephens said the Reserve Bank had a tough sell to the market in putting forward the case that the strong currency was underpinning a tepid inflation outlook because it may downplay the impact of rebuilding Christchurch, squeezing supply of everything from plumbers to roofing iron.

“We were expecting a dovish statement despite signs of a strengthening economy, and the Reserve Bank took that far further than I was expecting,” Stephens said. “Their forecast for inflation is a little bit on the light side in the short-run” given the looming stimulus for the reconstruction effort, he said.

That leaves the central bank in the same situation it was in 2003 when it tried to take the wind out of a surging currency in the face of a growing housing boom. That resulted in the Reserve Bank hiking the OCR to a record high 8.25 percent in 2007 near the height of the boom.

Westpac’s Stephens said December is probably the earliest the Reserve Bank can be expected to hike interest rates, based on the central bank’s projections and the Overnight Index Swap curve, which shows traders see 24 basis points of increases in the next 12 months.

The central bank was more optimistic in its forecast for GDP growth in the 2013 March year, which it sees expanding at a 3.7 percent pace, up from its previous forecast of 3.1 percent.

Bollard said global monetary stimulus was driving demand for risk-sensitive currencies such as the kiwi, and because of those international pressures there was little he could do to bring the currency down.

Because inflation is forecast to get close to the bottom of the target range this year, any appreciation in the kiwi dollar could damp expectations further, and that might spur Bollard to use a monetary policy response.

“Were we to see that strengthen to a point where it was actually bringing down our future expectations of inflation, then we always still have the prospect of reducing the official cash rate in response to that,” Bollard told reporters in Wellington.

The bank ramped up its forecast for the kiwi dollar since its December statement, with the TWI expected to hold above 70 until the December quarter next year. The Reserve Bank had previously expected the TWI to fall to 65 from 67 over that period.

The New Zealand dollar fell to 81.52 US cents at 9.25am from 81.92 cents immediately before Bollard released the monetary policy statement at 9am and recently traded at 81.64 cents. The trade-weighted index fell to 72.41 from 72.77 and was recently at 72.49.

Bollard has kept the benchmark interest rate on hold since March last year, when he sliced half a percentage point from the OCR as an insurance measure to shore up business confidence in the immediate wake of the Christchurch earthquake. He signalled a tighter policy in the latter half of the year, but pushed that out as Europe’s sovereign debt woes escalated, threatening to drive up funding costs for local lenders.

The easing of global financial stress meant the central bank’s fears of rapid growth in local lenders’ funding costs didn’t emerge, and the Reserve Bank only expects modest increases this year.

Earlier this week, the New Zealand Institute of Economic Research’s ‘shadow board’ recommended Bollard keep interest rates at or below the current level. That comes after Westpac Banking saw the flicker of rising interest rates on the horizon, and encouraged homeowners to switch their mortgages into fixed terms.

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1 Comment & Question

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Come on people
"The dollar falls"

What rubbish
If it fell by 5cents then that would be news.
This so called fall isn’t even newsworthy.

Bollard did this - wow shows just how much power he really does have (tui Ad).

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