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    Default Interest rates stay low - Bollard sticks to the plan

    Interest rates stay low - Bollard sticks to the plan

    Updated 9:05AM Thursday Jul 30, 2009

    Graphic / Christoph Lukasser
    Reserve Bank governor Alan Bollard has stuck to the script this morning and done what the market expected, leaving the Official Cash Rate steady at a record low 2.5 per cent.
    Economists and market watchers, expecting the status quo to be confirmed this morning are now scrutinising Bollard's words for clues about what risks worry him.
    On the one hand is the risk that recovery will be stunted by premature tightening of monetary conditions, with the exchange rate high and the markets pricing in a return to rising interest rates sooner than Bollard's past statements would warrant.
    "Despite signs of a levelling off in economic activity, the economy remains weak. We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels," said Bollard in a statement this morning.
    "The outlook remains highly uncertain. New Zealand's merchandise exports are heavily weighted to soft commodities. As a result, New Zealand has not benefited to any significant extent from the rebound that has occurred recently in global hard commodity prices.
    "Overall economic growth is evolving broadly in line with our forecasts in the June Monetary Policy Statement as the low OCR and stimulatory fiscal policy take effect. However, looking forward the level of the New Zealand dollar and wholesale interest rates are higher than assumed in our forecasts. The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks.
    "The forecast recovery is based on a further easing in financial conditions. If this easing does not occur, the forecast recovery could be put at risk. In these circumstances we would reassess policy settings.
    "Annual CPI inflation is currently well within the target band and it is expected to track comfortably within it over the medium-term.
    "We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010."
    The financial markets are pricing in three, or more likely four, 25-point increases in the OCR by this time next year, according to Credit Suisse's swaps-based indicator, despite Bollard's "expectation" that he will keep the OCR at or below 2.5 per cent until the latter part of next year.
    Of the 16 forecasters polled by Reuters only two were calling a cut this week and the average expectation for the OCR in eight months' time is 2.45 per cent.

    KEY INDICATORS
    * The Reserve Bank was widely expected to leave the official cash rate unchanged this morning.
    * Economists have been divided on whether it would leave the door open to further cuts.
    See the Reserve Bank statement here
    See the history of OCR changes here
    http://www.nzherald.co.nz/business/n...ectid=10587400
    "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


 

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