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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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By Roger J Kerr

Market swap interest rates have rallied lower over recent weeks, reflecting the belated re-assessment by the markets about the timing of OCR increases in 2010 from the RBNZ.

Swap yields may struggle to move a great deal lower from here, but do not expect any lift up for several months either.

The market outlook therefore appears very stable over coming months. Therefore, we have some time available to think about wider relationships between economic growth, inflation and short-term interest rates.

These two charts below support the view that 90-day interest rates may not travel much above 5.00% over coming years:-
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Bernard Hickey details the key news over the weekend in 90 seconds at 9am, including news Reserve Bank Governor Alan Bollard has told TVNZ it’s unrealistic for New Zealand to think it can match Australia’s incomes and we should be content with the crumbs that fall off Australia’s table. Australia’s mineral wealth gives it some natural advantages we can’t match, Bollard said.

He also said the New Zealand economy remained fragile and the housing market was spongy, meaning rates would stay on hold until the middle of the year, in line with previous statements.

Meanwhile, the Australian Government announced it would remove its wholesale deposit guarantee for banks from end of March, the Sydney Morning Herald reported. Bill English told NZPA that New Zealand was also considering lifting the wholesale guarantee.

The Dow wobbled late on Friday after weak US jobs figures.

Reserve Bank governor Alan Bollard said over the weekend the domestic economy was still fragile and the RBNZ remained comfortable with its view that it would keep the Official Cash Rate on hold until the middle or latter part of 2010.

Speaking to Guyon Espiner on TVNZ’s Sunday Q&A, Bollard also said the housing market was “looking slightly spongy” at the moment, despite previous fears of house prices going back into a boom. Bollard also reiterated his support for reform on property taxation.

The interview followed figures last week showing New Zealand’s unemployment rate jumped to 7.3% in the December quarter from 6.5% in September. The RBNZ had been forecasting a 6.6% unemployment rate for December, although Bollard said he did not think this meant the economy was in a lot worse shape than predicted:
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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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