Market listening for the unexpected

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All ears in financial markets will be tuned to what Reserve Bank governor Alan Bollard has to say this week because nobody is expecting him to actually do anything.

Monday, October 26th 2009, 11:23PM

by Jenny Ruth

A goodreturns.co.nz survey of 12 economists found none are expecting any change to Bollard's official cash rate (OCR), currently 2.5%.

"It's not so much what the Reserve Bank does that's going to create the fireworks, it's what they say," says Peter Cavanaugh at treasury risk management advisory firm Bancorp.

What the market is hoping for is that Bollard will shift the time frame for the first likely rise in the OCR this cycle to more closely match market pricing, Cavanaugh says.

While Bollard's most recent assertion is the OCR will remain where it is or lower through to late 2010. The wholesale interest rates market is pricing in a rate hike as soon as early as January.

"You have to sympathise with the market's viewpoint, given recent data, retail sales, migration and house prices, have been stronger than the Reserve Bank was assuming," Cavanaugh says.

ASB Bank economist Jane Turner expects Bollard to maintain his current stance but to drop his comment about the next hike being in the latter part of 2010.

"Given recent developments, this statement will no longer be seen as credible." Turner now expects the first rate hike in April next year.

Westpac chief economist Brendan O'Donovan is expecting Bollard to tighten from the first quarter of next year. "As time passes, the evidence mounts that the world economy is starting to find its feet again," O'Donovan says. As New Zealand's economy has fared better than most, Bollard will need to "normalise" monetary policy settings earlier than most, he says.

Darren Gibbs at Deutsche Bank is expecting only "a modest watering down" of Bollard's current stance. Annette Beacher at TD Securities says although Bollard could use the strength of the New Zealand dollar as an excuse to maintain his stance, he should follow Australia's lead and ignore that rather than "engaging in futile efforts to talk it down."

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