Bollard holds OCR at 3% on tepid recovery, quake

Bollard holds OCR at 3% amid slowing recovery, cuts tightening track

By Paul McBeth

Sept. 16 (BusinessDesk) – Reserve Bank Governor Alan Bollard held the official cash rate at 3%, as expected, and said the track for future rate hikes will be “more moderate” than previous forecasts as the Christchurch earthquake disrupts an already slowing recovery.

“The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to do so for some time yet,” Bollard said in a statement in Wellington today. “The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement.”

Bollard reined in the expected track of rate hikes to a slower pace than in his March and June policy statements, shaving more than a percentage point from the 90-day bank bill forecast in the second half of 2011 onwards. Before the announcement, markets were pricing in 69 basis points of increases over the coming year, according to the Overnight Interest Swap curve.

“Given the OCR is only moved in discrete multiples of 25 basis points, several on-hold decisions are implied by this forecast,” the September document said.

The kiwi dollar dropped to 72.75 U.S. cents after the statement from 73.13 cents immediately before the MPS was released.

Manufacturing and business confidence have been shrinking in recent months, and tepid housing and consumer spending data have kept economists downbeat about the prospects for New Zealand’s economy. Retail sales unexpectedly shrank in July, while August home sales have fallen to the same level in the depths of the global financial crisis.

These weak indicators were compounded by the collapse of South Canterbury Finance, the country’s second-biggest finance company, triggering a $1.775 billion payment to creditors under the government’s retail deposit guarantee scheme, and a 7.1 magnitude earthquake in Christchurch that caused an estimated $4 billion worth of damage.

The shocks have seen the Reserve Bank pare back its expectation for economic growth, with its annual GDP forecast pared back by 0.8 percentage point in 2011 and 1 percentage point in 2012. The following year is more buoyant, with 2.7% growth forecast for 2013, compared to 2% expansion predicted in the June statement.

Though New Zealand’s economy will have grown for six straight quarters at the end of September, the bank said “there are signs that growth is losing momentum.”

Today’s pause, though expected, forces Bollard to take the risk of between keeping stimulatory monetary conditions as inflation begins to accelerate. The impact of higher GST, ACC charges, tobacco excise and emissions trading charges is forecast to push the consumer price index over an annual pace of 5% in the first quarter of 2011.

“The challenge for the RBNZ remains how to continue moving policy interest rates towards less stimulatory settings without derailing the economic recovery,” economists at ANZ said before the MPS was released.

Just one of 19 analysts surveyed by Reuters expected Bollard to hike, with the rest predicting he’d hold rates.

Yesterday’s electronic cards release showed spending on debit and credit cards grew 0.1% last month, easing fears of a pre-GST hike buy-up among consumers, and Bollard’s outlook for inflation was softer than previously.

“Changes to indirect taxes and earthquake impacts will cause headline inflation to spike higher over the coming year,” he said. “Previous experience of GST increases, the fact that annual CPI inflation has been near 2% for the past year and a half, and the subdued state of domestic demand suggest this inflation spike will have little impact on medium-term inflation expectations.”

Bollard expects the weak housing market will keep a lid on inflation with soft demand for property likely sap real house prices, which are forecast to decline over the bank’s projection. The number of house sales fell to 4,287 from 4,411 in July, and was down 27% year-on-year, according to Real Estate Institute data, while the median sale price rose 0.3% to $350,000 in August, and was up 0.9% from the same month in 2009.

The bank pared back its forecast on annual inflation from its previous statement, with a spike to 4.8% in the June quarter next year, down from the 5.3% forecast for September 2011 in the last MPS.

The Reserve Bank cut about half a percentage point from its forecast for inflation, with CPI tracking closer to the middle of the bank’s 1% to 3% target band in the coming years, rather than near the top as previously predicted.

(BusinessDesk)

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