UPDATED: Bollard sees moderate path for rates

UPDATED: Bollard holds OCR at 3%, slows tightening track; bonds, kiwi fall

By Paul McBeth

Sept. 16 (BusinessDesk) – Reserve Bank Governor Alan Bollard held the official cash rate at 3% and pared back his track of interest rate hikes, sparking a decline in government bond yields and the kiwi dollar.

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. The rate isn’t forecast to rise above 4% until the December quarter next year, three quarters later than in the June forecast.

“This take the gloss off the New Zealand dollar for anyone looking for yield,” said Doug Steel, economist at Bank of New Zealand. “Often currency movements are about expectations, and now that the market’s found out kiwi interest rates aren’t going to go as high as they expected, the yield advantage is lessened.”

The yield on New Zealand government 10-year bonds sank 8 basis points to 5.37% and the kiwi dollar dropped to 72.75 U.S. cents after the statement from 73.13 cents immediately before Bollard’s statement as markets reacted to a slower track for interest rate hikes over the coming years.

Bollard told a media conference in Wellington increases in the OCR will be at a slower pace over the next few years, with a “softer story than we had before.”

The Christchurch earthquake compounded an already deteriorating picture for the local economy, though Bollard said a decision was made to go on hold the day before the disaster.

The Reserve Bank pared 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.

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)

© Scoop Media