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The Reserve Bank has fired a warning shot about the sudden recent sharp rise in interest rates.
The central bank said this morning that current levels of long-term interest rates in this country were “out of line” with its expectations.
The action by the governor was unusual, as he normally waits for his regular six-weekly review of interest rates before making comments on market conditions.
Reserve Bank Governor Alan Bollard said the recent rise in rates charged between financial institutions was “unwarranted and inconsistent with the monetary policy outlook”. A short time ago it was worth US55.
The New Zealand dollar reacted sharply to the announcement, falling over a cent in value against the American currency.
The comments by Bollard indicate a clear concern from him that recent actions of the markets could put further pressure on struggling Kiwi households and on the depressed New Zealand economy.9 cents compared with over US57c prior to the RBNZ statement. Governments around the world are issuing huge amounts of bonds as they seek to pump money into their own economies.
A number of factors have caused the recent increase in longer term rates.
There has also been a very strong rise in the value of the New Zealand dollar – largely due to the weakness of the US dollar.
This is forcing banks sourcing money offshore to pay higher rates. Several banks have increased their longer term fixed mortgage rates. .5 percent to 3 percent, indicated it did not see much more scope for further falls.
As well, the RBNZ, when lowering official interest rates from 3.
Continuation of such a trend could put further downward pressure on an economy that has been in recession since the start of 2008.
All of these factors have contributed to what is effectively a sharp tightening in monetary conditions within New Zealand – contrary to the RBNZ’s wishes. Furthermore, the risks around the outlook continue to be weighted to the downside,” Dr Bollard said in a statement.
“As we said in our 12 March Monetary Policy Statement, the economic recovery is expected to be very gradual.”
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Dr Bollard said that if this “apparent distortion” in the market persists, it could put unnecessary pressure on the cost of borrowing by firms and households.
“As indicated in our March Statement, we are projecting interest rates to remain at relatively low levels for an extended period.
A number of economists in recent days have been calling for just such an action from the RBNZ governor.
The comments by Bollard are effectively an attempt to “jawbone” interest rates and the New Zealand dollar down.