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By Bernard Hickey in Wellington

Watch Bernard Hickey deliver a report on YouTube here

Watch RBNZ Governor Dr Alan Bollard talk about the economy, interest rates and the housing market.

The Reserve Bank has left the Official Cash Rate (OCR) on hold at 2.5% and has repeated that it won’t be increasing the OCR until the “middle of 2010”. The Reserve Bank is scheduled to make OCR announcements on June 10 and July 29. The OCR has been on hold since April 30 last year.

Governor Alan Bollard said the economy was recovering broadly as expected and growth was expected to pick-up further through 2010. However, consumer spending and business investment was more subdued than in previous recoveries as indebted households and corporate increased saving and reduced debt, he said.

Some concern about decisions on property taxation in the May 20 budget budget also appeared to have slowed activity in the market for existing homes, the Reserve Bank said. It forecast stagnant real house prices over the next couple of years.

The Reserve Bank also pointed in its Monetary Policy Statement to likely one-off increases in prices later this year to come from increases in ACC levies and the Emissions Trading Scheme (ETS). It did not refer to an expected GST increase to 15% from 12.5%, but said it would “look through” the impact of the ETS as long as it did not change inflation expectations.

Here is the rest of the Governor’s statement below.

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The Reserve Bank of Australia has increased its official cash rate by 25 basis points to 4%, widening its gap over New Zealand’s official cash rate (2.5%) to 1.5%.

Here is the full statement below from the Reserve Bank of Australia’s Governor Glenn Stevens.

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By Roger J Kerr

For many years the RBNZ has regarded 90-day interest rates between 6.00% and 6.50% as “neutral” for monetary policy settings.

Interest rates 2.00% below there were seen as a “loose” monetary stance and 2.00% above as “tight”.

The global credit crunch, banking crisis and resultant GFC in 2007 to 2009 has changed that paradigm permanently in my view.

It may be a little premature to make this call, however the evidence is gathering that the new “neutral” for monetary policy setting in New Zealand is 90-day interest rates at 5.00%.

I do not see wholesale 90-day rates moving much above 5.00% over the next two years, unless the economy takes off to 5% GDP growth rates and inflation risks go up with the booming economy. It is very hard to see this scenario happening in the current environment.

The three major factors that support this paradigm shift are as follows:- (more…)

The Reserve Bank of New Zealand has released a discussion document proposing options for new liquidity requirements for non-bank deposit takers (NBDTs), which include finance companies, credit unions and building societies. (Updated with other options, details)

One option was to keep the status quo where trustees set liquidity requirements on a case-by-case basis in trust deeds, it said. Another option was to prescribe quantitative requirements for liquidity and mismatch ratios to be monitored either by trustees for the Reserve Bank.

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Reserve Bank Governor Alan Bollard has defended the bank’s performance through the financial crisis and its use of inflation targeting as its main monetary policy tool, but has said he welcomes reforms to taxation of property to rebalance the economy.

Bollard responded in detail to critics, including Opposition Leader Phil Goff, in a speech to the Canterbury Employers’ Chamber of Commerce in Christchurch. (Update 4 includes links to Economic Weather Report video)

See an Economic Weather Report on Bollard’s speech here on our video page.

Watch video on Youtube here.

Bollard said inflation targeting had stabilised inflation since its introduction with the Reserve Bank Act of 1989, although there remained other macroeconomic imbalances that needed to be addressed with tax reforms to the property investment sector.

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The Reserve Bank of New Zealand has left the Official Cash Rate on hold at 2.5% and again pledged to leave it on hold until the middle of 2010. The global economy and the New Zealand economy were recovering, but sustained growth overseas was dependent on continued fiscal and monetary support and vulnerable to weak financial sectors, the bank said.

(Update 4 includes links to special report video. Update 5 includes ANZ reaction.)

New Zealand inflation remained within the bank’s target range and the removal of monetary stimulus was not needed until the middle of 2010, Governor Bollard said. This was in line with the bank’s December announcement and economist expectations. The New Zealand dollar fell marginally to 70.3 USc in the first 10 minutes of trade after the announcement before rebounding to 70.6 USc by 9.40am.

See here for a special report on the Reserve Bank’s decision and how the RBNZ is receiving monetary policy help from a number of outside sources.

Watch on YouTube here.

My view:

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