Monetary Policy Unchanged

Monday 03 August, 2009

The highlight from a general media commentary point of view this week was this morning’s review of the official cash rate by the Reserve Bank. As practically everyone expected they left it at the 2.5% level reached in April. The rate was 8.25% just over a year ago and just before the Lehman Brothers investment bank collapse in the middle of September was at 7.5%.

As expected the Reserve Bank noted the restraining impact on growth of the exchange rate and fixed interest rates being above levels they assumed in their June economic forecasts and warned that “Despite signs of a levelling off in economic activity, the economy remains weak. We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels.”

They retained their previous comment that they intend leaving the cash rate “…at or below the current level until the latter part of 2010.” In that regard, perhaps the only surprise for the markets was that the Reserve Bank indicated no pullback in their easing bias and in fact sounded slightly more dovish than expected. But the comments were not earth-shattering so it is back to other business which we now discuss – such as struggling exports, rising confidence, and of course the slowly recovering housing market. Actually, the Reserve Bank could have made comments about the housing upturn generating an unbalanced economic recovery but did not. That might be because their comments about downside risk still for the official cash rate imply they would expect to stimulate housing even further!

Source: Tony Alexander, Chief Economist of the Bank of New Zealand