RBNZ should stop surprising the market: economist

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The Reserve Bank surprised the market for a third consecutive time yesterday.

Friday, March 12th 2004, 8:51AM

by Jenny Ruth

The Reserve Bank surprised the market for a third time running, this time by not only leaving interest rates unchanged but also in its dovish rhetoric which suggests only one further small rate increase, if any, will be necessary.

Governor Alan Bollard justified the do-nothing stance by noting that domestic inflation is being offset by weak imported inflation and the strong New Zealand dollar and because of tentative signs the economy may be slowing.

The extent of the surprise can be seen in the way wholesale interest rate markets reacted, the 90-day bank bill rate dropping 15 basis points to 5.5% and the June bank bill futures falling nine basis points to the equivalent of 5.6%.

"They’ve been listening from the sound of it. It’s by far the most dovish (statement) you could have expected," says Brendan O’Donovan, chief economist at Westpac Bank. O’Donovan had hoped Bollard would "see sense" and leave rates unchanged.

He notes that the Reserve Bank’s assumptions have factored in a sharp drop in net migration which should take the heat out of the housing market.

But he is critical of the way the central bank has been surprising the market. "It’s not really what you’re after with a central bank. They should be leading the market by the nose," O’Donovan says.

Sean Comber, an economist at ANZ Bank, which had expected a rate increase, although, as with most economists, had seen it as a close call, says the content of the statement could have been used just as easily to justify a rate rise. He also noted that the Reserve Bank has left the door open for another rate increase.

Whether or not the bank does raise the OCR again is "heavily contingent on the tenor of the data and New Zealand dollar movements," Comber says.

He says the next two OCR reviews will be crucial. If the economy is starting to slow, that should be seen in the data in the next three months. "If the signs don’t emerge by the middle of the year, then they probably won’t emerge," he says.

To see how the market's reacted go to Good Returns' Markets Page

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