Bollard hints at earlier rate hikes; kiwi jumps

Thursday, 10 December 2009, 11:00 am

Article: Businesswire

Bollard hints at earlier rate hikes; kiwi jumps Thursday, 10 December 2009, 11:00 am

Article: Businesswire Bollard brings forward timing of OCR hikes, driving up kiwi dollar, short bond rates By Paul McBeth Dec. 10 (BusinessWire)

Reserve Bank Governor Alan Bollard brought forward the likely timing of increases in the official cash rate after lifting his forecast for the pace of economic growth, driving up the kiwi dollar and short bond rates.

Bollard kept the OCR unchanged at a record low 2.5%, as expected, and said provided the economy continues to grow, “conditions may support beginning to remove the monetary stimulus around the middle of 2010.” He has previously said rates would not rise until the second half of next year.

Search New Zealand Business Related Stories on Scoop NZ dollar jumps on Bollard hint of early rate hike 10/12/2009 Bollard to hold rates steady; may point to rebound 07/12/2009 RBA hikes rates for third straight month 01/12/2009 Bollard talks down impact of rate hikes on kiwi 21/10/2009 NZ inflation accelerates; kiwi dollar jumps 15/10/2009 Results powered by More Related Stories >>> “The economy continues to recover, reflecting improved world growth, higher export commodity prices, increased government spending and housing strength,” Bollard said in a statement released in Wellington today.

The New Zealand dollar jumped to 71.87 U.S. cents after the Monetary Policy Statement was released in Wellington, from 71.22 cents immediately before. The yield on two-year government bonds soared 20 basis points to 4.55%. “I’m a little surprised they are happy for business and mortgage rates to go up,” said Grant Hassell, who oversees about $4 billion as head of fixed income at AMP Capital Investors.

The central bank may have been “spooked” by the strength of the housing market. Helping underpin the kiwi, Bollard indicated a “sense of comfort” with the current level of the New Zealand dollar, which “stops it falling any further in my view,” Hassell said. There is a “very real possibility” the RBNZ hikes rates in March, as the market has priced in, especially given the Reserve Bank of Australia probably won’t slow its tightening process. Still, Bollard would prefer to wait until June, he said.

Domestic property values climbed 1% in the 12 months through November, the second month of gains from the same time a year earlier, according to QV Valuations data. The central bank will have to walk a fine line over stoking economic activity without over-egging it as inflation begins to speed up ahead of Bollard’s expectations and the housing market continues to show signs of emerging from the lethargy of the past 18 months.

The Reserve Bank’s Expectations Survey found respondents see inflation accelerating to a 2.6% annual pace from 2.3% over the next two years. Prices unexpectedly rose in the third quarter, with the Consumer Price Index increasing to an annual 1.7%, according to government data, ahead of the 1.2% pace forecast by the RBNZ. The central bank has a benign outlook for inflation, and Bollard said he expects the annual consumer price index will remain below 2% until early 2011 and “track within the target range over the medium term.”

The Reserve Bank expects the 90-day bank bill to begin rising in the June quarter next year, when rates climb 0.1 percentage points to 2.9%, and increase to 3.3% in the September quarter. The bank previously forecast this to occur in the December quarter of 2010 and March quarter of 2011, respectively.

Before today’s statement, traders had been betting the central bank would hike the OCR by 1.63 percentage points in the next 12 months, based on the Overnight Index Swap curve. The scale of expected tightening has declined in the past month as Bollard reiterated the divergence of monetary policy between New Zealand and Australia, where rates have been rising for the past three months. Bollard said he tried to combat the market’s tendency to “price some degree of interest rate normalisation” once investors guessed the OCR had hit its bottom by adopting his outlook on how long interest rates would remain depressed.

“We believe this communication has helped reduce the extent to which markets priced near-term OCR increases,” he said in his report. The trade-weighted index for the New Zealand dollar, the central bank’s preferred method of tracking the currency, has climbed more than 24% from its low in March, and has damped Bollard’s preferred export-led recovery.

“The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery,” he said and the central bank predicts the 90% gain in dairy prices on Fonterra Cooperative Group’s online auction website over the past four months have largely been offset by resurgent currency. New Zealand climbed out of its first recession in a decade in the second quarter this year as returning expatriates and an inflow of new migrants helped underpin the housing market, and boost business and consumer confidence, and the bank boosted its forecast for economic growth, projecting 1.1% quarterly gains in gross domestic product in the December quarter next year and March quarter of 2011.

The central bank said unemployment had been tempered by businesses cutting worker hours rather than laying off staff, and was near its trough. The Reserve Bank cut its projections for the unemployment rate, which is expected to peak at 6.7% next year, down from the 7% forecast in the September statement. Bollard highlighted the links between monetary and fiscal policy, and said “fiscal consolidation would help reduce the work that monetary policy might otherwise need to do” as the economy returns to growth.

The central bank’s main policy tool came under scrutiny after Parliamentarians criticised the big our Australian-owned banks earlier this year for failing to pass on all of the OCR cuts to their customers. Faster consolidation and tweaks to the tax system could help increase the national savings rate, and lead to lower interest rates on average, he said in his report.

A big uncertainty for the economy is whether consumer spending will follow on from the resurgent property market, with households taking a “very cautious” approach to their spending decisions, Bollard said.

Consumer spending has shown a small spark ahead of the Christmas shopping season, with core retail spending on electronic cards, which excludes auto-related sales, up 0.3% according to Statistics New Zealand. (BusinessWire)