Floaters and short-term fixed rate borrowers can breathe a bit easier in the knowledge that their pockets will not be adversely effected, with the Reserve Bank today announcing that he will leave the Official Cash Rate (OCR) unchanged at 2.5 percent. Reserve Bank Governor Alan Bollard said:
The New Zealand economy is recovering broadly as expected and growth is predicted to pick up further through 2010.
Trading partner activity has recovered more quickly than we expected. Growth in Asia has been particularly strong. Consistent with this, export commodity prices have increased close to their 2008 peak. At the same time, risks to the global outlook remain elevated.
Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued. Similarly, business spending is weak and firms continue to reduce debt.
On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2 percent for the past year, is expected to track within the target range over the medium term.
As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected. [emphasis added]
The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve, is expected to make OCR increases more effective than in the past. Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles.
My Interpretation and Predictions
I think that ANZ National Bank Limited’s Chief Economist, Cameron Bagrie’s prediction for no rise in the OCR until September 2010 to hold true. This is because of the wording which I put in bold to emphasis it. Governor Bollard has bought the Reserve Bank time, and now is very unlikely to raise the OCR to 2.75% at the 10 June 2010 OCR review. I believe that the recovery New Zealand is experiencing is going somewhat slowly and a lot of business owners, property investors and home owners are unfortunately still feeling the ‘pinch’. As a result I also consider it slightly unlikely at this stage, that the OCR will be raised on 29 July 2010. This fits into the time-frames that Governor Bollard suggested with his oft repeated statements early last year, that the OCR will not be raised “until the latter part of 2010″.
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