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No mortgage relief as Bollard holds rate

NZ Herald

Reserve Bank governor Alan Bollard today signalled no relief for mortgage holders in the near future as he held interest rates steady at 8.25 per cent.

However, he indicated increasing uncertainty in the world economy could play a part in his future decisions this year.

The Federal Reserve in the US yesterday dropped its rates by three-quarters of a per cent - the biggest single cut in 23 years. Rates there, at 3.5 per cent, are markedly lower than in New Zealand but Dr Bollard gave no hint that he would be following the American lead any time soon.

He again indicated inflation was a key concern and his decision came after Finance Minister Michael Cullen, writing in today's Herald, said inflation was "persistsent" and driven by global rises in food and oil prices.

Dr Bollard said: "While the housing market continues to cool, the labour market remains tight, domestic income growth is still strong, especially from dairy, and core inflationary pressures persist."

He referred to "turbulence" in international financial markets and a deteriorating outlook for the US and European economies.

"We will be watching these developments closely, particularly their implications for the Asian and Australian economies and for world commodity prices," Dr Bollard said.

"Despite this, the New Zealand economy is projected to keep growing reasonably well."

Goldman Sachs JBWere strategist Bernard Doyle said he doubted the Reserve Bank could have done much more than it did.

"What we're taking out of this is virtually no chance of a rate hike this year, and just watch and wait mode which we believe will show increasing signs of a domestic slowdown."

UBS NZ senior economist Robin Clements said today's decision was "straight down the line, recognition that there are parts of the New Zealand economy slowing, but there are parts that are still tight".

Deutsche Bank chief economist Darren Gibbs said that by the end of the year the Reserve Bank "might just sneak an easing in".

Dr Bollard said ongoing inflationary pressures came from an "expansionary fiscal policy" and rising food and energy prices.

The Emissions Trading Scheme due in a year's time would also impact in energy prices.

"On balance, the outlook for interest rates is little changed from the December Monetary Policy Statement, but the level of uncertainty has increased," Dr Bollard said.

Inflation was expected to remain above 3 per cent during 2008 but keeping interest rates at around the current rate would help bring the inflation rate down in the medium term.

Dr Bollard declined to answer any questions.

Today's decision is the fourth in a row holding the OCR at 8.25 per cent, after the Reserve Bank initially raised it to that level in July.

Some economists have suggested that were it not for the difficult international situation, and even though New Zealand already has the highest official cash rate in the industrialised world, the Reserve Bank could have been looking to lift the OCR even further.

The NZ dollar firmed to US76.20c from US75.95c just prior to the announcement.

Tags: darren gibbs - alan bollard - bernard doyle - robin clements

Source: NZ Herald