Bollard on hold until 2011 as inflation stays tame

Bollard on hold until 2011 as inflation stays under control

By Paul McBeth

Oct. 28 (BusinessDesk) – Reserve Bank Governor Alan Bollard will probably keep the official cash rate at a “very stimulatory” level until next year as retailers absorb the GST hike and keep prices under control.

Bollard held the OCR at 3% to help revive a sagging economic recovery as New Zealanders focus on repaying debt rather than ramp up spending. Thought this was holding back the economy, he said the “subdued state of domestic demand” suggests the government’s 2.5 percentage points hike to consumption tax will have “limited impact on medium-term inflation expectations.”

“Rates are on hold for now, and probably will be into next year, with the Reserve Bank happy that there won’t be any inflation surprises,” said Darren Gibbs, chief economist at Deutsche Bank NZ. “I’d look for a rate hike in March, but I wouldn’t rule out January if there was a pick up in the data.”

New Zealand annual inflation slowed to a six-year low 1.5% in the 12 months ended Sept. 30, near the bottom-end of the central bank’s target band of between 1% and 3%. Last week, Bollard told Parliament’s Finance and Expenditure Committee he hadn’t seen much impact on prices from the increase in GST.

Bollard pared back his inflation expectations in the September monetary policy statement, picking a peak of 4.8% in the June quarter next year, down from previous forecasts of a 5.3% high in the 2011 September quarter.

Christina Leung, economist at ASB, said the RBNZ is “being too sanguine about the medium-term outlook” and there are upside risks to the central bank’s inflation forecasts.

“We expect the increase in GST in early October and further Government charges over the coming year will boost annual headline CPI to over 5% by mid-2011,” she said. “We continue to expect the RBNZ will resume lifting the OCR in March.”

Australia’s consumer price index accelerated at a slower-than-expected 0.7% in the three months through September, according to government data, damping expectations the Reserve Bank of Australia will tighten monetary policy as fast as anticipated. The trans-Tasman neighbours’ policies have diverged over the past year when the RBA embarked on hiking rates after Australia dodged recession as Chinese demand for raw materials stoked economic activity.

Since then, Australia’s benchmark interest rate has climbed above New Zealand’s and RBA Governor Glenn Stevens has kept it at 4.5% for the past five months. That yield advantage is expected to narrow over the coming 12 months, with traders betting the RBNZ will hike rates 64 basis points and the RBA 44 points, according to the Overnight Index Swap curve.

Yesterday’s National Bank Business Outlook showed companies were more upbeat this month as export season approaches, though the strong kiwi dollar weighed on their expectations for offshore sales.

Earlier this month, the New Zealand Institute of Economic Research, which puts out the quarterly survey of business opinion, said a string of downbeat data during the September quarter raised the threat of a double-dip recession and raised questions about the sustainability of the recovery. Along with GDP and inflation, the confidence survey is closely followed by the central bank when setting monetary policy.

(BusinessDesk)

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