OCR left at record low 2.5pc

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard has held the official cash rate at 2.5 per cent citing the "restrained" outlook for inflation, while warning that the kiwi dollar's strength may prompt a review of monetary policy if it persists without cause.

"The New Zealand dollar has stayed elevated despite recent falls in commodity prices," Bollard said in a statement. "Should the exchange rate remain strong without anything else changing, the bank would need to reassess the outlook for monetary policy settings."

The currency's strength has kept a lid on tradable inflation, giving Bollard room to keep rates low. Last month he said if the strong kiwi brought down the bank's future inflation expectations he may have to cut the benchmark interest rate.

Last week, government figures showed tradable inflation contracted for a second quarter. The first-quarter consumer price index was 0.5 per cent, short of the 0.7 per cent forecast by the central bank.

"Inflation is restrained and is expected to stay near the middle of the bank's target range" of between 1 per cent and 3 per cent, Bollard said. "For now, it is appropriate for the OCR to remain at 2.5 per cent."

Supporting the kiwi dollar has been the nation's relatively appealing interest rates in a world where major central banks are holding their rates near zero. The US Federal Reserve today repeated its commitment to low interest rates until late-2014.

Earlier this week AMP Capital Investors said the currency is overvalued, and its head of strategy Keith Poore told a media briefing he expects the kiwi will be in the "high 70s this time next year" as markets digest New Zealand's widening current account deficit and falling commodity prices.

"Because inflationary pressures in the economy still appear to be well contained, and the NZD remains strong, we continue to expect that the OCR will remain on hold until at least the end of the year," ASB economist Jane Turner said in a note before the release.

Last month, the central bank lowered the track of the 90-day bank bill rate, often seen as a proxy for the OCR, stripping out gradual increases this year. The bank sees the bill rate at 3.3 per cent by the end of 2013, having previously forecast it to be 4 per cent.

Traders are betting the central bank will add just 4 basis points to the OCR in the coming 12 months, according to the Overnight Index Swap curve before the release.

Bollard today flagged signs of life in local economic recovery, with increased activity in the housing market.

"That recovery will strengthen as repairs and reconstruction in Canterbury pick up later in the year," he said.

That comes as economists pare back the strength of the local economic recovery, and delay its timing, with much pinned on the mammoth reconstruction effort in Canterbury after last year's earthquakes.

Bollard said the global economic outlook is still a concern, with financial market sentiment "fragile", even as immediate concerns about the re-emergence of a European sovereign debt crisis were soothed.

See recent changes to the Official Cash Rate here.