Bollard sees out 2009 with OCR at 2.5% 

Source: NZPAAlan Bollard

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Reserve Bank governor Alan Bollard has kept the official cash rate at 2.5%, in a move widely expected by the market.

However, contrary to some market expectations, Bollard signalled a possible rate rise in the middle of next year.

This compares with the bank's previous wording that the rate would remain at or below 2.5% until the second half of 2010.

"If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010.

"Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action,' he says.

Across the Tasman, the Reserve Bank of Australia has already started to lift its rates, raising the cash rate from 3% in October by 25-basis-points and by the same amount again in November.

RBA governor Glenn Stevens has said the risk of serious economic contraction in Australia has now passed.

Bollard says there is sill some uncertainty over the recovery of New Zealand's economy with households cautious on borrowing, and business cautious on spending.

He says the strong New Zealand dollar continues to hinder an export-led recovery, and he also expects the current account deficit to widen in the future.

New Zealand's economy at the moment, Bollard says, is being supported by both monetary and fiscal policy support. He says as growth becomes self sustaining, "fiscal consolidation would help reduce the work that monetary policy might otherwise need to do".

ASB economist Jane Turner says ASB expects the central bank will raise the official cash rate earlier than Bollard has signalled and is picking a 50-basis-point rise in April.

"We expect the housing market to continue challenging the RBNZ's comfort zone," she says.

Turner says continued sharp house price growth and faster consumer spending and credit growth could see Bollard alter his tone come March.

There appear to be few worries about inflation, with Bollard expecting that it will remain below 2% until early 2011, well within the bank's 1%-3% target range.

However, Turner says there is little room for the Reserve Bank to absorb any inflation surprises other than to raise rates earlier than expected.

The OCR has been at a historic low of 2.5% since April this year.

NZI Business will also analyse the announcement on Friday morning, TV ONE at 6am.

Are you happy with the decision to hold the OCR at 2.5%? Are you worried about a big OCR hike in 2010? Leave your comments on the messageboard below.

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