31 Jul 2009

Bollard's dollar focus surprised markets, say economists

11:47 am on 31 July 2009

The Reserve Bank surprised markets with its focus on the dollar at Thursday's Official Cash Rate announcement, say economists.

Bank governor Allan Bollard left the benchmark interest rate unchanged at 2.5%, focusing almost half of his statement on the problem posed by the rising dollar.

Dr Bollard also said the Official Cash Rate could move lower in the coming quarters.

After the decision and accompanying statement, the dollar fell by nearly a cent against the greenback.

Deutsche Bank's Darren Gibbs says that would have pleased the Reserve Bank.

Mr Gibbs says there is still a danger that keeping interest rates low could encourage house price rises. If that triggers a return to excessive borrowing and spending, it would result in a shaky recovery, he says.

Before the announcement on Thursday morning, currencies around the world fell on news of share sell-offs in China.

Westpac currency strategist Imre Speizer says the dollar stayed comparatively steady but unwound fully on Dr Bollard's comments.

Mr Speizer says Dr Bollard's comments focused on threats to the economy such as the high dollar and poor returns on exports.

Goldman Sachs JB Were strategist Bernard Doyle says further rate cuts are unlikely until at least the middle of 2010, despite the bank's gloomy statement.

Mr Doyle says a pick-up in export-led growth should be on the way.

Dairy co-operative Fonterra said this week there were already tentative signs of strengthening demand and firming prices for some products in international markets.

However, Fonterra also warned that the rising dollar was keeping downward pressure on the milk price.

A senior economist for BERL, Ganesh Nana, believed the Reserve Bank had not gone far enough to deal with the rise of the dollar, noting that the cash rate is not the only tool at Dr Bollard's disposal.

A Reuters poll of 15 economists found only one believed a rate cut was likely in September's monetary policy statement.