Bollard sticks to OCR script

OPINION: Currency markets are wrong, says Alan Bollard. New Zealand's economy isn't as strong as they think and there was no reason for the kiwi dollar to gain US4c against the greenback in the last four weeks.

''This appreciation is inconsistent with the softening in New Zealand's economic outlook and moderation in our export commodity prices,'' he said.

Other than this unusually specific remark about the dollar, our Reserve Bank governor stuck to his expected script this morning, delivering a comfortingly unsurprising boost in the cash rate to 3 per cent.

This is still a low rate by historical standards - before the financial crisis the OCR had never been below 4.5 per cent.

Monetary policy therefore remains firmly in stimulation mode.

Mortgage rates, the main way the OCR influences the wider economy, are also still at low levels. According to Reserve Bank data variable rates averaged 6.24 per cent last month.

Other than during the extremes of last year, we haven't seen mortgage rates that low since the 1960s.

Meanwhile the economy is growing. Current indicators point to GDP growth of about 3 per cent in the coming year - yesterday's National Bank confidence survey, for example, reported a net 32 per cent of firms expected better times ahead for their own business.

This is lower than last month's result but still healthy.

In this context, governor Bollard's decision to increase the cash rate suggests continuing confidence in an improving outlook.

However - there is always a however when talking about the economy - the drivers of growth are fragile and the Reserve Bank was more cautious in its comments about the future, remarking that ''the pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement.''

So we're not out of the woods yet. Among clouds on the horizon, strength in the construction industry from Rugby World Cup projects could dissipate next year.

And then there's the uncertain effect of GST and income tax changes, with lower immigration and investment.

As a result, it may be quite some time before interest rates reach more normal levels.

Currency markets take note.

- © Fairfax NZ News