Bollard keeps interest rates on hold
A day after the Federal Reserve slashed a key US interest rate in a bid to head off a US recession, Dr Bollard made it clear his focus remains firmly on the fight against rising prices.
He acknowledged ongoing turbulence in international financial markets and a deterioration in the outlook for the US and Europe, but said the New Zealand economy was projected to keep growing reasonably well.
%26quot;Ongoing inflationary pressures are underpinned by an expansionary fiscal policy, and rising food and energy prices,%26#39;%26#39; Dr Bollard said in an official statement on today%26#39;s rate review.
Prices would also be under further pressure in a year%26#39;s time from the Government%26#39;s emissions trading scheme.
Goldman Sachs JBWere strategist Bernard Doyle said he doubted the Reserve Bank could have done much more than it did.
%26quot;What we%26#39;re taking out of this is virtually no chance of a rate hike this year, and just watch and wait mode which we believe will show increasing signs of a domestic slowdown.%26#39;%26#39;
UBS NZ senior economist Robin Clements said today%26#39;s decision was %26quot;straight down the line, recognition that there are parts of the New Zealand economy slowing, but there are parts that are still tight%26#39;%26#39;.
Deutsche Bank chief economist Darren Gibbs said that by the end of the year the Reserve Bank %26quot;might just sneak an easing in%26#39;%26#39;.
Today Dr Bollard said the Reserve Bank believed the current level of the official cash rate (OCR) at 8.25 percent remained consistent with future inflation outcomes of 1 to 3 percent on average over the medium term.
At the end of last year inflation surged above the Reserve Bank%26#39;s target to an annual rate of 3.2 percent, and the Reserve Bank expects it to stay above 3 percent throughout this year.
Dr Bollard said that while the housing market continued to cool, the labour market remained tight, and domestic income growth was still strong, especially from dairy.
He has come under some criticism for his sharp focus on inflation, with stock exchange chief executive Mark Weldon saying the Reserve Bank could not %26quot;make these interest rate decisions in a vacuum%26#39;%26#39;.
Following the Fed%26#39;s decision, a flood of money would come into this country, pushing the exchange rate to even higher levels, Mr Weldon said.
%26quot;It is the relative gap between our interest rates and the US and global interest rates … in driving our exchange rate that matters, in driving our economic health over the medium term.%26#39;%26#39;
The economy could not sustain a permanently high interest rate and high exchange rate environment, he said.
In his statement Dr Bollard said the Reserve Bank would be watching overseas developments closely, particularly their implications for the Asian and Australian economies and for world commodity prices. He declined to answer any questions.
Today%26#39;s decision is the fourth in a row holding the OCR at 8.25 percent, after the Reserve Bank raised it to that level in July.
It comes a day after the US central bank cut the benchmark federal funds rate by three-quarters of a percentage point to 3.5 percent, the biggest reduction in more than 23 years, taking the rate to its lowest level since September 2005.
The NZ dollar rose more than half a cent soon after today%26#39;s rate announcement to US76.50c, from US75.95c just before. - NZPA
