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26-07-2007

Reserve Bank raises cash rate again

As expected, the Reserve Bank increased interest rates for the fourth time in a row this morning, lifting the official cash rate to 8.25 per cent.

But the lift in the official cash rate (OCR) from 8 per cent is likely to be the last one, Reserve Bank governor Alan Bollard said.

ANZ National chief economist Cameron Bagrie said today's raise was expected but the call that it was likely to be the last one was interesting.

Mr Bagrie said it was a prudent strategy for the economy, and expected interest in the Kiwi dollar to start waning.

The dollar fell on the news of the rise to dip briefly under the US80c mark before returning to just above it about 11am.

"I think the New Zealand (dollar) is looking pretty toppy at these sorts of levels."

Dr Bollard pointed to the tight labour market, rising oil prices and food prices as inflationary pressures that required dampening.

"That is why we are increasing the OCR today," he said.

Equally he said the 0.25 per cent rise in the OCR would encourage New Zealanders to save, and previous rate hikes had started to show a slowdown in borrowing.

"Provided they keep this up, we think the four successive OCR increases we have delivered will be sufficient to contain inflation," Dr Bollard said.

Westpac lead economist Brendan O'Donovan said the Reserve Bank announcement was a clever one.

Mr O'Donovan said the Dr Bollard was sending a message to the market that they were finished increasing, a move that had quelled the dollar initially, but whether they could hold that strategy depended on the economy reacting to four successive rate increases and slowing somewhat.

Mr O'Donovan said the odds were still with another OCR increase in six weeks at the next announcement if economic data continued to be strong.

"It's a conditional we've finished, but if the data continues its recent strong run, they'll be forced to go again."

While today's rise was expected, some thought it unnecessary with Cameron Brewer of the Newmarket Business Association described Dr Bollard's move as "like firing live rounds into a retreating crowd"

He said all Auckland's retailing districts had been reporting a very flat winter and all the empirical evidence was already pointing downwards.

The hike was unnecessary as consumer spending and confidence had been falling for months. He said retailers were experiencing their toughest winter since the Asian financial crisis a decade ago.

"Let's not forget that Dr Bollard has not dropped the OCR since 24 July 2003 and in fact for the last four announcements it has gone up.

"This instrument alone has already been starting to bite and wear down consumers."

"It has been a particularly cold winter in Auckland, but it seems the economic chills are far from over," Mr Brewer said.

The recent strength of the dollar had been attributed partly to the popularity of the currency because investors known as "carry traders" could borrow at low interest rates in other countries and buy Kiwi dollars to take advantage of New Zealand's high interest rates.

Mr Bagrie said this morning's announcement would be interpreted as bed news for the New Zealand dollar.

"The market is now going to price in the next move from the Reserve Bank as being a cut instead of a hike. That gives a very different message to overseas investors who are looking at playing the carry trade," he said.

Official cash rate recent history
DateMoveOCR
26 Jul 07+0.258.25pc
7 Jun 07+0.258.00pc
26 Apr 07+0.257.75pc
8 Mar 07+0.257.50pc
25 Jan 07No change7.25pc
OCR previously unchanged since 8 Dec 05

The dollar originally broke through the US80c barrier on Monday night and peaked at a new 22-year post-float high above 81c on Tuesday.

Dr Bollard said the strong economy was good news for New Zealand but acknowledged the rising dollar was hurting exporters.

He warned that the exchange rate was not sustainable in the medium term and investors should be aware of that.

Predicting currency movements is nearly impossible, and most commentators' continual prophecies of a correction have been confounded by the relentless recent strength of the dollar.

Some economists had been picking the exchange rate to continue upwards, with at least one raising the possibility of reaching parity with the US dollar.

The Reserve Bank's continual OCR increases had raised the ire of New Zealand's primary export sectors.

Industries such as seafood and some exporting manufacturers have called for the government to intervene through section 12 of the Reserve Bank Act - which enables the government to direct the bank in what to do.

Seafood Industry Council general manager Alistair Macfarlane has said every 1c rise in the exchange rate against the US dollar costs the fishing industry $20 million in lost earnings.

There has been no statement from the Government on the possibility of an intervention but Finance Minister Michael Cullen has admitted trying to ward off currency speculators and offshore "carry" traders - who borrow money at low interest rates in places like Japan and invest in New Zealand dollars - by warning of the possibility of a sudden drop in the Kiwi dollar.

The .25 of a percentage point increase will hurt homeowners on floating interest rates or those whose fixed rates are coming up for renewal - about a quarter of current mortgages are due to be renegotiated during the next 12 months at fixed rates around 9 per cent.

with NZPA

 

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