by Jenny Ruth
As expected, Reserve Bank governor Alan Bollard left his official cash rate (OCR) unchanged at its record low 2.5% with the European financial crisis and its impact on the global economy the main reason.
While the central bank still has rate rises pencilled in from sometime after June or September next year, wholesale financial markets clearly don't believe that will happen as they didn't react to Bollard's statement and are still pricing in no rate hikes next year.
Although the Reserve Bank's view has changed considerably from its September monetary policy statement when it had a rate hike tagged for the March quarter next year, Dominick Stephens, chief executive at Westpac, says the statement was more hawkish than he expected.
"I didn't expect them to be so adamant about no (rate) cuts," Stephens says.
Financial markets have disregarded the Reserve Bank's stance, he says. "The market expects the global situation is going to evolve worse than the Reserve Bank is expecting."
One reason Bollard still sees the need for higher rates down the track is the likely boost to growth from rebuilding Christchurch.
Stephens says that is starting to happen and estimates about $400 million of building activity is currently occurring in Canterbury. He is forecasting a 12% increase in residential investment activity in the three months ending this month as a result.
"But it's 12% off a very low base."
Peter Cavanaugh at Bancorp Treasury Services says the central bank considered a scenario in which the impact of the European crisis is worse than expected in which case it expects interest rates to remain unchanged next year.
"Overall, the tone of the statement is quite sobering. There aren't many positives in it and a lot of caution," Cavanaugh says.
Nick Tuffley at ASB Bank says the Reserve Bank has anticipated further downside from the European situation and its forecasts for European growth are now below consensus, although the consensus forecasts are likely to come down further.
"A brief and mild recession is about the best Europe can hope for," Tuffley says.
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