Bollard keeps OCR steady but flags further cuts

Reserve Bank governor Alan Bollard left rates unchanged as expected but surprised many in the market by explicitly leaving the door open to further rate cuts if the New Zealand dollar remains strong.

Thursday, July 30th 2009, 9:58AM | Read Comments

by Jenny Ruth

Bollard reiterated that he expects to keep his official cash rate "at or below the current level through until the latter part of 2010."

His comments sent the currency sliding three-quarters of a US cent to 65 cents while wholesale interest rates sank between five and 10 basis points. His OCR remains unchanged at 2.5%.

"The big concern is the New Zealand dollar," says Nick Tuffley, chief economist at ASB Bank. "The Reserve Bank is stressing that monetary conditions are certainly not going the way it desires."

Dairy farmer payouts are likely to remain subdued over the next couple of years and the outlook for tourism isn't strong either. Tuffley is expecting Bollard will cut the OCR again in September or October although "that will depend on whether the currency remains pretty elevated.

Anthony Byett at FX Matters says although Bollard will be pleased to see the currency fall, "I don't think he's that enthusiastic about cutting interest rates."

The pick up in the housing market and household consumption isn't at all what the central bank wants to see. Byett says he would like to see the Reserve Bank look at other more direct tools for controlling the housing market and preventing a surge in lending which current low interest rates are likely to fuel and which would create problems once rates rise again.

Interest rates can't stay down at these levels forever." Those other controls could include more stringent capital requirements or tighter controls on loan-to-valuation ratios, Byett says.

Annette Beacher at TD Securities says Bollard was correct to shrug off his Australian counterpart's relative hawkishness and to highlight that while prices of "hard" commodities have rebounded, prices of the "soft" commodities, such as dairy products, to which the New Zealand economy is heavily weighted have not.

Bollard's statement was "appropriately dovish," Beacher says.

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