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Business editor Corin Dann shares his thoughts on the Reserve Bank's decision to keep the official cash rate on hold at 2.5%.
On balance I think Bollard had to hold the official cash rate , because while the high dollar is hurting, particularly dairy farmers, Bollard needs to be mindful of other sectors of the economy such as housing, which are rebounding.
However, the currency remains a concern and he has tried to talk the currency down by leaving the door open for more easing and pledging to keep rates low until late 2010.
Exporters were calling for a cut to make New Zealand's interest rates less attractive to overseas investors. However, it's not clear a cut would have made that much difference. The Kiwi dollar is being dragged along by global forces including the association with a robust Australian economy.
Rightly or wrongly, the Kiwi is also a commodity currency which remains popular because it is seen as benefiting from a global rebound.
Bollard's gripe is that New Zealand's main commodities are soft, such as dairy, and these have not seen the price recoveries of Australia's main commodities like iron ore.
For borrowers the message is again clear: you can ride the short term rates for at least another year but beyond 2011 be prepared for significantly higher rates.
There are a number of risks that remain with Bollard's scenario. On the one hand, if the world economy recovers quicker than thought, Bollard may have to break his promise and raise rates sooner than signalled. This is something which some in the market are already anticipating.
On the other hand, if the dollar goes higher and dairy prices continue to suffer, the recovery could be hurt and Bollard will need to make one more round of cuts.
To read more of Corin Dann's blogs CLICK here .
