Alan Bollard

Wellington, Dec 10 NZPA - The Reserve Bank left interest rates unchanged, but its comments surrounding the decision were more hawkish than many economists expected.

The date for the first hike in the official cash rate (OCR) from the current record low 2.5 percent is widely thought to have been brought forward, with some commentators looking for a rise in April, and the possibility of a March increase also being mentioned.

The Reserve Bank's comments had an immediate impact on the New Zealand dollar which rose from around UA71.20c at 9am, when the rate decision was announced, to around US72.50c by early afternoon.

In his statement today, Reserve Bank Governor Alan Bollard said that if the economy continued to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010.

That compares to his previous most recent indication that the Reserve Bank expected to keep the OCR at the current level until the second half of 2010, or just a few months ago that it expected to keep the OCR at or below the current level until the latter part of 2010.

BNZ Capital head of research Stephen Toplis described the Reserve Bank's Monetary Policy Statement (MPS), published alongside the OCR decision, as a "nirvana forecast".

He pointed to opinions in the MPS that growth would jump to 3 percent next year and 4 percent in 2011, that the unemployment rate had peaked, that wages would start to push higher, that house prices were rising at double digit rates, and yet measured inflation would stay well within the target band.

That target is for consumer price index inflation of 1 to 3 percent on average over the medium term.

By making those predictions, the Reserve Bank had reduced the chance they might be achieved, Mr Toplis said.

"Interest rate curves start to price in much more aggressive rate hikes than might be necessary and, as usual in good times, the New Zealand dollar heads for the stars.

"Not surprisingly, that's exactly what happened this morning with fixed interest markets now pricing in a first rate hike in the March quarter and the currency up over a cent."

Clearly the Reserve Bank had been "spooked" by a combination of rising house prices, continued strength in non-tradables inflation, rising commodity prices, and strengthening business confidence, Mr Toplis said.

BNZ Capital's central view for a long time had been that rate hikes would start in June, and it saw no reason to adjust its projections.

ASB's economists said they continued to expect the first rate hike to be a 50-basis point increase in April.

The Reserve Bank no longer had much scope to absorb upside surprises to the inflation outlook, other than to lift rates earlier than intended.

Notably, the Reserve Bank had been prepared to acknowledge that the recession had not triggered a period of muted inflation, it merely appeared to wipe out the excess inflation pressure from the economy, the ASB economists said.

They expected the housing market to continue challenging the Reserve Bank's comfort zone, and raised the "stitch in time" concern: "the longer the lift in house prices continues, the more risk of either a return to a debt-fuelled economy or a mini boom/bust that threatens overall recovery".

ANZ economists said they had brought forward their date for the first rate hike to June from September.

Reading between the lines, the Reserve Bank had given itself a lot of flexibility in terms of when it tightened, the ANZ economists said.

Signalling the middle of 2010 effectively meant it could move any time between April and September.