Bollard turns more hawkish on next rate hike

Reserve Bank governor Alan Bollard surprised financial markets by taking a slightly more hawkish stance on when interest rates need to rise again, bringing him more in line with what most economists are thinking.

Thursday, December 10th 2009, 9:43AM | Read Comments

by Jenny Ruth

Bollard left his official cash rate (OCR) unchanged at 2.5% but now says his first rate hike may come "around the middle of 2010" rather than in the second half of next year.

The New Zealand dollar jumped nearly a US cent to just below 72 US cents while the yield on the June bank bill futures rose about 15 basis points in reaction.

"They've shifted to a more hawkish stance," says David Plank, an economist at Deutsche Bank. "They've shifted their view quite a reasonable amount to something that's more sensible," he says.

"I, for one, was concerned they were ignoring some of the inflation risks."

Nick Tuffley, chief economist at ASB Bank, says most people are still expecting Bollard to raise the OCR somewhere between April and June and today's statement represents a gradual shift towards those expectations.

"We still think there's a risk that the Reserve Bank tightens a bit earlier than they're saying but the gap's starting to close up a little now," Tuffley says.

Brendan O'Donovan, chief economist at Westpac, says the Reserve Bank has raised its growth forecasts markedly and now expects 3.6% growth in the year ending March 2011, up from 3.1% previously, rising to 3.9% the following year, up from 3.4% previously.

The figures don't include the impact of the emissions trading scheme which will add about 0.4 percentage points to inflation and that would take 2011 inflation close to the top of Bollard's target range, O'Donovan says.

"There's clearly less and less need to keep the cash rate at extremely stimulatory levels," he says.

The central bank's "got a big fish on the line but they're trying to reel it in with a light tackle."

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