Thursday, 13 September 2007

RBNZ keeps interest rate unchanged

The Reserve Bank of New Zealand has become the latest central bank to decide to wait out the on-going turmoil in credit markets. AFP/CNA reports:

Reserve Bank of New Zealand Governor Alan Bollard said the official cash rate would remain at 8.25 per cent, one of the highest rates in the developed world.

"Credit concerns and heightened risk aversion have led to significant turbulence in global financial markets," Bollard said.

"This development increases the likelihood of a weaker economic outlook for the United States and New Zealand’s other key trading partners than in recent forecasts."

Meanwhile, in a BusinessWeek article, Michael Englund, chief economist for Action Economics, says that "there are no signs of widespread ill effects" from the turbulence in credit markets thus far, with yields generally remaining "low" and spreads "arguably in line with historic levels". These and other benign observations have been reflected in recent commentary by Fed officials.

In total, the mix of Fed commentary thus far, in the context of the available data on the evolution of the credit crunch, almost uniformly suggests that the Fed is less prone to entertain a more aggressive policy trajectory than some market participants assume...

Nevertheless, the FOMC will be pilloried if it doesn't act. We expect a quarter point easing at the Sept. 18 meeting, followed by a similar move in October.

I doubt that Fed officials would be too bothered if the pillory comes only from investors. But criticism from recession-intolerant politicians and economists would be another matter.

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