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No rate rise next week – but listen for change in Bollard’s tone

Reserve Bank governor Alan Bollard reviews the official cash rate again next Thursday and it would be a brave gambler who put money on a rate rise this early.
The Reserve Bank's stance has for some time been that it will not lift the official cash rate (

Rob Hosking
Thu, 22 Apr 2010

Reserve Bank governor Alan Bollard reviews the official cash rate again next Thursday and it would be a brave gambler who put money on a rate rise this early.

The Reserve Bank’s stance has for some time been that it will not lift the official cash rate (OCR) – currently at 2.5% – until “around the middle” of the year.

In theory that allows plenty of wiggle room: rises in the rate could come at any of the next four meetings – due, respectively, on April 29, June 10, July 29 and September 16.

Inflation figures out this week, along with last week’s retail sales data, show the domestic economy is still not exactly leaping out of the starting blocks. Any lift in the rate next Thursday would be seen as premature.

Whether Dr Bollard should move in June or July is now the focus of much discussion among economists – that, and whether changes should be gentle 0.25% rises or chunkier 0.5% ones.

The overnight index (OIS) markets have gradually moved away from earlier pricing of an OCR hike by now: at present the pricing is for a rise in July.

One of the keenest economic hawks, TD Securities strategist Annette Beacher, now says any tightening is not likely until July, but that inflationary pressures are only dormant and could yet surprise.

Another hawk, UBS New Zealand economist Robin Clements, says the OCR is still at stimulatory levels and the Reserve Bank risks holding it at those levels for too long.

Mr Clements – who, this time last year, was the only bank economist to suggest, correctly, that the recovery could start as soon as the end of the second quarter – says the Reserve Bank may be unlikely to fulfill his own prognosis of 0.5% rises in both June and July but that the central bank still needs to make an early – June - start to lifting the rate.

Less hawkish is BNZ, which has a “formal” outlook of the first rate rise in June but economist Craig Ebert, in a bulletin this week, suggested it “feels as though it should just shift our formal view to July for the first OCR hike.” However, he is holding off because other data still to emerge could point to higher inflation in the shorter term.

And then there is the fact that any moves in the OCR are very much forward looking: time lag effects mean they are concerned with what the inflationary picture is likely to be in a year to 18 months.

That alone points to a June, rather than a July, rate rise. Dr Bollard may give a clearer indication on that next Thursday.

What he is unlikely to do though is lift the rate just yet.

Rob Hosking
Thu, 22 Apr 2010
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No rate rise next week – but listen for change in Bollard’s tone
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