RB positions for quick change

Reserve Bank governor Don Brash left his official cash rate (OCR) unchanged today, as expected, but says the risks on both sides of that decision have increased since his last statement in November.

Wednesday, January 23rd 2002, 12:01PM

by Jenny Ruth

The OCR, which directly affects floating mortgage rates and indirectly influences fixed rate mortgages, remains unchanged at 4.75%.

"This decision reflects a balancing of risks between a domestic economy that seems rather more buoyant than we expected (in November) and continuing weakness offshore," Brash says.

"As expected in November, growth in the economies of our trading partners has continued to be sluggish. Notwithstanding a widespread expectation that a global recovery is imminent, there remains a material risk that the situation could deteriorate further. The outlook in Japan is of particular concern," he says.

He also highlights the fact that New Zealand’s export commodity prices have fallen quite substantially and earlier than expected.

Peter Cavanaugh, associate director at Bancorp Treasury Services, likens Brash’s position to "sitting in the middle of a seesaw," only the length of and weights on each side have increased. "That should put people more on alert’’ that the momentum could swing very quickly in either direction.

For Stephen Toplis, head of market economics at Bank of New Zealand, the statement does mark a shift in central bank policy away from an easing bias towards a more neutral stance.

Nevertheless, "they want to be in a position where they can move either way very quickly,’’ he says.

With the domestic economy travelling so strongly, "I do think the balance is shifting, but it’s shifting rather than shifted," Toplis says. It would be inappropriate for Brash to signal any imminent rise in interest rates when international developments could still tip the balance in the other direction.

Toplis still expects Brash will begin raising rates in the third quarter of this year.

Wholesale financial markets barely moved in reaction to the statement. Toplis says the futures market is pricing in a rise in interest rates in the second half of this year and Brash ``would have to have good reason to change those expectations.’’

John McDermott, chief economist at National Bank, was intrigued that Brash singled out Japan as worthy of mention. "For them to actually mention Japan means they’ve been looking at the issue. There’s a question about what they’ve seen happening in Japan,’’ he says. The March monetary policy statement is likely to expand the bank’s concerns.

Brash’s statement highlighted the strength of domestic activity. ``Consumer spending appears more buoyant than expected previously, and indications are that business investment is also holding up better than expected,’’ he says.

"The housing market has strengthened in recent months, and the labour market continues to be relatively tight.’’

Brash also warned that inflation, always his over-riding concern, is likely to be well above 2% in the year ending March "which would become a concern if any resultant increase in inflation expectations were reflected in price and wage setting behaviour.’’ Brash is pledged to keep inflation between zero and 3%.

"These factors are pushing inflation in opposite directions. In the weeks and months ahead, the bank will be watching closely to detect which set of pressures is beginning to predominate,’’ Brash says.

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