Bollard leaves interest rate steady at 2.5pc

The Reserve Bank has left the Official Cash Rate unchanged this morning, in yet another sign that the worst of the economic recession may now be behind us.

Many were expecting that optimism about economic recovery would lead to Bollard keeping the cash rate at 2.5 per cent.

Governor Alan Bollard said this morning he expected the bank would keep the OCR "at or below the current level through until the latter part of 2010".

"There is more evidence that the decline in economic activity is coming to an end, and that a patchy recovery is underway," he said.

"This is partly due to recovery in our trading partner economies in the June quarter and these look likely to continue expanding in the short term. Domestically, retail spending appears to have stopped falling, following a rise in net immigration and a pick-up in the housing market over recent months."

The medium-term growth outlook remained weak, said Bollard. "

We expect household spending to grow only modestly given weak income growth and a reduced appetite to take on debt. Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar; this limits the scope for employment and investment to rebound quickly.

"For growth to be sustained in the medium term there is a need for improved competitiveness in the export sector and a continued recovery of household savings. This rebalancing is required to stabilise New Zealand's external payments position."

He said that if exchange rate was to continue its recent appreciation and/or the recovery in house prices were to undermine the improvement in household savings, then "the sustainability of the present recovery will be brought into question".

"As we have said previously, the forecast recovery in economic activity is based on monetary policy continuing to provide substantial support to the economy. We expect such support will be needed for some time. As a result, we continue to expect to keep the OCR at or below the current level through until the latter part of 2010."

NZ HERALD STAFF