Bollard spooks market

Reserve Bank governor Alan Bollard

Bollard left his official cash rate (OCR) unchanged at its record low 2.5% "for now."

Westpac chief economist Dominick Stephens says although Bollard acknowledged the weakness in recent inflation and growth data and declining business confidence, he didn't change his stance.

"There was no overt change in how the Reserve Bank sees the outlook for the economy or monetary policy," Stephens says.

"The market's read that as the Reserve Bank saying: I see the weaker data but I'm not going to change my plan," he says.

The New Zealand dollar spiked up about 0.6 US cents and both shorter and longer-dated interest rates rose about four basis points in reaction.

Stephens says a significant omission in Bollard's statement was that he didn't mention the strength of the domestic currency.

Robin Clements at UBS New Zealand says the market had been pushing the likely timing of Bollard hiking too far. Clements is still officially expecting a rate hike in December and thinks it will be March at the latest.

Nick Tuffley, chief economist at ASB Bank, says the market reaction should be seen in the context of data this month showing weaker than expected inflation both here and in Australia.

New Zealand inflation rose just 0.4% in the September quarter, nearly half the 0.7% expected by both the market and the Reserve Bank, and Australian underlying inflation in the quarter was just 0.3% compared with market expectations of 0.6%.

Bollard said he sees New Zealand's annual underlying inflation rate settling at 2%, the middle of his zero to 3% target.

Tuffley says Bollard still does have a bias towards raising rates and if the impact on the New Zealand economy from the worsening situation in Europe is mild, then he expects the central bank will raise the OCR in March.