Bollard's low OCR likely to refire housing market

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Reserve Bank governor Alan Bollard's insistence on keeping his official cash rate (OCR) low could light a fire under house prices again, according to Westpac chief economist Brendan O'Donovan.

Thursday, October 29th 2009, 10:48AM 3 Comments

by Jenny Ruth

Earlier, Bollard left his OCR unchanged at 2.5% and said he expects to keep it there until the second half of 2010.

"Because the Reserve Bank's committing to keep rates low for such an extended period, we're in for a double digit spike in house prices," O'Donovan says, adding house prices rose 4% in the last three months.

Bollard expressed concerns about the composition of renewed growth and particularly about a credit-fuelled rebound in the housing market. O'Donovan says higher interest rates is the solution to such problems.

"Instead they're indicating to households there's a strong likelihood short rates will be low until the second half of next year," he says.

Bollard did drop the possibility of lowering the OCR further but in O'Donovan's view "until the second half of 2010" is exactly the same as Bollard's previous statement "until the latter part of 2010.

Other economists do detect a slight softening in the change of wording.

"The Reserve Bank has moved a step closer to the market's view," says Darren Gibbs at Deutsche Bank. But he's also dashed hopes of the next rate hike coming as early as January. "The Reserve Bank has made it clear it's got no intention of going down that track," Gibbs says.

Bollard said: "In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus."

Nick Tuffley, chief economist at ASB Bank, says Bollard seems to be "avoiding talking about anything positive. He does seem to be putting aside some fairly significant and positive developments."

Tuffley agrees with O'Donovan about the contradictions of Bollard's stance. "It's like he's saying, we're going to keep rates low but we don't want people to borrow any money," Tuffley says.

He's still of the view Bollard will raise the OCR sooner than he's currently indicating "from these emergency levels" closer to more normal levels. Before the current easing cycle, which started in July 2008 when Bollard started cutting the OCR from 8.25%, the lowest the OCR had been was 4.5% when it was first introduced in March 1999.

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