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Bollard holds OCR: will lift rate 'over coming months'

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  • Bollard holds OCR: will lift rate 'over coming months'

    Bollard holds OCR: will lift rate 'over coming months'

    Rob Hosking | Thursday April 29, 2010 - 09:03am
    In a more upbeat message about the economy than in recent months the Reserve Bank this morning again opted to keep the official cash rate where it is at 2.5%.
    No one expected Reserve Bank governor Alan Bollard to lift the OCR this morning, even though yesterdays’ National Bank business confidence survey was more optimistic than anticipated.
    Rather, the focus was on whether there would be any signal about when the rate, which is currently at stimulatory levels, would be raised. The previous choice of words from the central bank has been rises would begin “around the middle of the year.”
    Today, the choice of words changed but the meaning didn’t alter much.
    “As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected,” Dr Bollard said.
    Growth is running slightly higher than the Reserve Bank expected in its March monetary policy statement.
    Crucially, Dr Bollard remains relatively dovish on inflation: it is expected to track within the 1-3% band over the medium term.

    http://www.nbr.co.nz/article/bollard...-months-122203
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    'over coming months'

    What's that mean??

    Comment


    • #3
      Bernard Hickey: Tightening without hiking the OCR

      10:30 AM Thursday Apr 29, 2010
      Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell


      The Reserve Bank has slightly opened its forecast window for the first rate hike by a month or two in this statement. It now has the flexibility to delay the first hike to September 16 from the previous window of June 10 and July 29.
      Governor Bollard has the leg room to stretch out a bit because inflation remains contained and the squeeze currently on bank lending, along with a rightly cautious bunch of consumers, is keeping the pressure off prices in the local economy.
      He also has two new 'tools' which are allowing him to hold the OCR and still effectively tighten retail interest rates.
      Firstly, the Core Funding Ratio introduced from April 1 and a push by the banks themselves to wean themselves off the 'hot wholesale money markets' has effectively engineered a slight tightening in actual retail interest rates, despite the flat OCR.
      This will continue as the funding ratio tightens further over the next two years to 75 per cent from 65 per cent. KPMG estimates this could increase lending rates by a further 50 basis points, although the Reserve Bank thinks it will be less.
      The Core Funding Ratio forces the banks to fund their lending from more stable and longer term sources such as long term bonds or local term deposits. These more stable funding methods are more expensive for the banks and they have passed on the costs in the form of higher lending rates.
      Since April 30 last year, when the Reserve Bank cut the OCR to 2.5 per cent, the average 2 year fixed mortgage rate has actually risen from 6.24 per cent to 7.13 per cent, Interest.co.nz data shows. This is partly to account for the average 1 year term deposit rate having risen from 4.39 per cent to 5.05 per cent over the same period.
      Secondly, borrowers are increasingly opting for floating mortgage rates, which are lower than fixed rates for the first time in a generation. Since April 30 last year the average floating mortgage rate has fallen from 6.34 per cent to 5.86 per cent.
      This is known in the business (and referred to in the Governor's statement, as curve steepening. Longer term rates have risen, but shorter term rates have fallen.
      This means that around 30 per cent of mortgages in New Zealand are now floating, almost double what it was at the peak of the housing boom when banks were able to keep fixed rates lower than variable rates because they could suck in cheap foreign money from the 'hot' wholesale money markets. Strangely enough, borrowers are going for the cheaper option.
      KPMG estimates that around 70 per cent of new mortgages being written are now floating.
      This is why the Reserve Bank now feels confident that it can wait a teeny bit longer. It believes that when it does hike the effect on the economy will be more immediate and it won't have to raise the rate as high as in the future. Fair enough.
      It is good that the Reserve Bank has these extra powers, both directly through the Core Funding Ratio and indirectly through the curve steepening.
      But I still think the Reserve Bank should have hiked today or should at least have stuck to its previous time-table of a 'middle of 2010' hike.
      The Reserve Bank of Australia has already hiked 5 times since October last year and is widely expected to hike for a sixth time to 4.5 per cent next week.
      It is experiencing the biggest mining boom in over a century and it is our biggest trading partner. The New Zealand dollar has fallen sharply against the Australian dollar, boosting returns for exporters to Australia and encouraging droves of tourists to come here. Commodity prices are at record highs.
      China is also tightening to slow its economy from a break-neck pace of 11.9 per cent growth in the first quarter. It is also cracking down on a credit-fuelled real estate bubble that is spilling over the sides into the Canadian, the Australian and Auckland markets. China is now our second biggest buyer of exports after Australia.
      Consumer spending in New Zealand, particularly with credit cards, is picking up again and business confidence surveys are signalling GDP growth of 4-5 per cent in the year ahead. Leaving interest rates at 2.5 per cent seems a tad risky with that sort of growth outlook.
      INTEREST.CO.NZ
      http://www.nzherald.co.nz/business/n...ectid=10641583
      "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

      Comment


      • #4
        In answer to your question dandan
        It now has the flexibility to delay the first hike to September 16 from the previous window of June 10 and July 29.
        "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

        Comment


        • #5
          I would have put it up a quater percent.
          The system could have taken that ok.
          Why? because I would want to get the correct ratio of spare money into banks and thus into houses at the right cost.
          In other words, set up the best long term borrower to lender relationships, sustainable deals.
          It's touch and go though, maybe they were correct in holding off for a wee bit longer.
          They must have some very recent economic data that points to a flatline.
          Wouldn't it be great to have all that (up to the second) data at your fingertips.
          Last edited by McDuck; 30-04-2010, 10:13 PM.

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