Bollard raises rates but tones down the rhetoric

While Reserve Bank governor Alan Bollard raised interest rates as expected, the central bank's rhetoric wasn't as hawkish as expected.

Thursday, March 8th 2007, 10:27AM

Bollard raised his official cash rate (OCR) from 7.25% to 7.5%, blaming the recent pick-up in economic activity and the acceleration in the housing market. He also a complained about "continuing rapid expansion of mortgage credit at very low margins, and strong growth in household incomes."

Seeming in a perverse reaction, the New Zealand dollar fell about 0.4 US cents and wholesale interest rates rallied about five basis points.

Nick Tuffley, chief economist at ASB Bank, says the issue wasn't so much today's hike but how strongly Bollard would hint at another rate hike.

"The market got a bit of a perception that maybe he might come out and be a little hawkish," Tuffley says. Instead, Bollard is signalling that he will continue to adopt a gradual approach "and not rush in and over-do it."

The last time Bollard raised rates was in December 2005.

Craig Ebert, an economist at Bank of New Zealand, says there's a sense that the Reserve Bank has "a reluctance to do what they know they need to do."

He suspects the central bank has failed to appreciate how financial markets would interpret the statement, which still does leave the door open to another rate hike.

The statement said that a further rate hike may be needed "depending on the persistence of the current upturn."

"They're still hoping something's going to happen to slow this economy down. I think they're going to be disappointed on that front," Ebert says.

Bollard also said the central bank is "continuing to assess alternative measures" to augment the OCR, including tightening tax rules on housing investments and "changes to bank capital requirements to help moderate the amplifying effect of credit on the housing cycle."

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