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.
Sunday, March 14th 2004, 1:05PM
by The Landlord
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.
