Looking for subtext in Bollard's statement 

Source: NZPAAlan Bollard

Today's OCR statement was always going to be about semantics.

Could Dr Bollard stick to his earlier pledge to keep interest rates low or below current levels until the latter part of next year?

In the end he has... just. There has been a subtle, but not insignificant change in wording.

So yes, Dr Bollard will keep interest rates at their current level until the second half of 2010.

But gone is any reference to rates going lower in future.

This is not a huge surprise.

Dr Bollard's interest rate pledge has been coming under intense pressure from the markets who are pricing in hikes far sooner than the later part of next year.

This is on the back of stronger than expected inflation data, rising retail sales and rebounding house prices.

The removal of this reference to lower rates is an acknowledgment that the economy has improved faster than anticipated and there shouldn't be any need to bring rates down further.

The decision to stick to the pledge to hold rates at 2.5% until late 2010 will be more controversial.  

Dr Bollard is aware of this and has moved to head off any criticism by stressing that inflation is forecast to remain well within the target band of 1-3%.

He's also highlighted the fact that the high New Zealand dollar is hurting exports and is limiting the ability for an export led recovery.

The message to borrowers from all this is that while you need to be cautious - the window of cheap floating rates will remain open for a little longer yet... Perhaps another nine months or so going by today's statement.

But be warned, Dr Bollard could still change his stance in six weeks' time.

What was also interesting from today's statement was a comment regarding fiscal policy.

In his statement Dr Bollard appears to be asking the government to, in future, reduce the amount of cash it is has been pumping into the economy.

The rationale being, that if the government could do that, it would ease the pressure on inflation and mean that when the Reserve Bank does have to hike rates, it could be at a slower and gentler pace.

The question is how does the government wind back its stimulus? Is much of it seen as essential to help prop up a still fragile economy?

Does it simply cut back on spending? Or, does it raise taxes? Remember the tax cuts were a key part of the government's stimulus package.

It's hard to imagine a National government raising taxes, so less government spending would seem to be the most likely scenario.

Not necessarily an easy task for any government when unemployment is still rising.

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