Bollard keeps OCR on hold

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard kept the official cash rate unchanged at 2.5 per cent and pushed out the track for future rate hikes as Europe's instability weighs heavily on global growth.

"Political and economic stresses in Europe, along with a run of weaker-than-expected data, have seen New Zealand's trading partner outlook worsen," Bollard said in a statement. "It remains appropriate for monetary policy to remain stimulatory."

The central bank trimmed its forecast for the 90-day bank bill rate, often seen as a proxy for the OCR, with the rate unchanged at 2.7 per cent until June 2013, before peaking at 3.4 per cent in March 2015. It had previously expected the rate to rise in December this year.

That indicates rates will rise at a slower pace than expected in a Reuters poll of economists, which was picking the bank to lift the benchmark rate a quarter point by March next year, and a further 25 basis points to 3 points by June. The kiwi dollar rose to 77.48 US cents after the statement from 77.32 cents immediately before.

View the Monetary Policy Statement here.

Bollard's decision means the OCR has been unchanged for 10 consecutive meetings, matching the 2006 stretch when the benchmark rate was untouched for the longest time in its 13-year history.

Market pricing could be interpreted "as a small chance of a hefty reduction in the OCR in the event of a major adverse global event rather than the market expecting further modest easing by the Reserve Bank," the bank said.

Before the release, traders were pricing in just 13 basis points of cuts over the coming year, according to the Overnight Index Swap curve, down from 44 basis points earlier this month.

"It would be unwise for the RBNZ to cut interest rates in the manner that the market has been trying to price," Bank of New Zealand head of research Stephen Toplis said in a report before the release. "If Europe implodes, as it may well do so, then all bets are off" though the central bank would be better to be reactive than proactive if the euro-zone does deteriorate.

The central bank cut its growth forecast due to "recent and projected falls in export commodity prices." Economic growth is still expected to peak in 2014, though at a slower pace of 3 per cent rather than the 3.7 per cent predicted in March.

Falling commodity prices "will weigh on economic activity in New Zealand," though a depreciating currency "partially offset" the decline, Bollard said.

The trade-weighted index is expected to fall more sharply, with the bank forecasting the currency to drop to 66 by March 2015, having previously projected it would decline to 67.40.

That comes after the International Monetary Fund said the currency was 15 per cent above where it needs to be for New Zealand to bring its current account deficit to a more sustainable level.

The IMF sees New Zealand's current account deficit rising to 7.1 per cent of gross domestic product and net external liabilities to 84.8 per cent of GDP by 2016, and cites it as a key risk to the economy.

The Reserve Bank also expects a bigger current account deficit, forecasting it to peak at 6.2 per cent of GDP in the 2014 March year, as a "large increase in investment more than offsets an improvement in government and household saving."

Bollard said inflation will likely "settle near the mid-point of the target range" between 1 per cent and 3 per cent next year, as a strong currency and deteriorating situation in Europe erode tradeable inflation and pushes it to the bottom of the band this year.

As the economy picks up, the bank expects "a moderate removal of monetary stimulus will be enough to offset any inflationary consequences of absorption of spare resources."

See recent changes to the OCR here.