Brian Fallow: Not much Xmas cheer, but no Grinch either

Photo / Thinkstock

There was not much Christmas cheer from the Reserve Bank today but no Grinch in evidence either.

The December monetary policy statement is, as expected, dominated by concerns about the global, and especially the European outlook.

But in terms of the impact on New Zealand it is a case of so far, so not so bad.

The bank says it is prudent to leave the official cash rate on hold "for now" at 2.5 per cent, citing not only the unusual level of uncertainty about the global outlook but also the moderate pace of domestic demand.

It has pencilled in three OCR hikes over the coming year, but that is predicated on a central scenario in which Europe suffers only a mild recession - shrinking 0.6 per cent before recovering within a year.

The MPS also outlines an alternative scenario in which interest rates remain flat, based on a much sharper drop in trading partner growth - clearly the view the financial markets are factoring in.

Even that scenario does not include a freezing of financial markets such as occurred in 2008. In that event, governor Alan Bollard said, "all bets are off".

The bank's forecasts have growth picking up gradually from a pace of about 0.6 per cent a quarter now to 0.8 per cent by the end of next year as the rebuilding of Christchurch gets under way in earnest.

Both households and businesses are expected to remain cautious. Fiscal policy turns contractionary and the strong improvement in the terms of trade is expected to be partially unwound, though the bank expects export prices to remain relatively high by historical standards.

Real house prices are expect to be flat and consumption growth subdued.

Economists expect the main channel through which Europe's travails will to affect New Zealand to be through higher costs for the 25 per cent of banks' funding they derive from overseas wholesale markets.

The Reserve Bank said today that tightness in international markets meant funding costs for local banks would increase to some degree over the coming year.