UPDATE: Bollard holds OCR; expects to hike about mid-year

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Reserve Bank governor Alan Bollard has left interest rates unchanged and reaffirmed his expectation he will begin hiking rates around the middle of the year.

Thursday, January 28th 2010, 10:44AM

by Jenny Ruth

The official cash rate (OCR) remains unchanged at 2.5%.

The statement was nearly identical to Bollard's last statement in December but left out comments about some uncertainties including whether increased household spending would follow rising house prices.

"You get the sense of slightly greater clarity about the first tightening being about the middle of the year," says Darren Gibbs at Deutsche Bank. "There's a sense of greater confidence."

Gibbs still expects Bollard to start hiking the OCR in April. "I get the feeling that the next couple of months' data is going to look reasonably solid. We will get some confirmation the economy is moving forward at a more solid rate."

Nick Tuffley at ASB Bank says Bollard's comments on inflation indicate he's "not unduly worried about the inflation outlook."

In particular, signs the housing market has run out of steam somewhat "has take away some of the urgency," Tuffley says.

While he still expects the first rate hike to come in April, Tuffley says rather than a few 50 basis point increases, they're likely to be more modest 25 point rises and that an OCR of about 5% will likely be about neutral.

But bank funding costs will still remain high and the gap between the OCR and mortgage rates is likely to stay significantly higher than before the credit crisis, Tuffley says.

Although floating mortgage rates are likely to rise quite rapidly, "things look a bit skewed in favour of floating remaining cheaper, although more volatile" than fixed-rate mortgages, he says.

Bollard also removed a comment in the December statement on the high New Zealand dollar hurting exports. Dominick Stephens at Westpac says the central bank probably thought the high exchange rate was unjustified but since then we've seen a rapid rise in dairy prices and the currency's rise was consistent with that. "Exporters are doing better not worse."

The currency has also weakened somewhat since then.

« OCR holds, mid-year rate hike still likely

Bank liquidity requirements could keep rate hikes to a minimum »

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