Bollard leaves OCR at 3pc

Reserve Bank governor Alan Bollard. Photo / Mark Mitchell

The Reserve Bank has left the Official Cash Rate on hold at 3 per cent, a widely expected move.

In a statement just released, Bollard said interest rates were "now projected to rise to a more limited extent over the next two years than signalled in the September Statement."

Bollard has also just released the quarterly Monetary Policy Statement.

"The pace of economic growth appears to have moderated. Corporate investment intentions are now below average. Household spending also remains weak, with household credit still flat and housing market activity slowing further," said Bollard.

He said house prices might "decline a little further in the near term". This continued household and business caution suggested current low interest rates were having a less stimulatory effect than in the past.

The New Zealand dollar fell to 74.53 US cents from 74.94 cents immediately before the statement was released. The trade-weighted index fell to 67.47 from 67.84.

Today's pause mirrors the Australian and Canadian central banks, which also held their benchmark rates this week, as the global economy remains shaky amid heightened concerns over European sovereign debt and America's ability to revive its sagging recovery.

Before the release, traders were betting the RBNZ will hike the OCR by 69 basis points over the coming year, narrowing the gap with its Australian counterpart, which has 31 points priced in, according to the Overnight Index Swap curve.

Bollard said on the positive side, activity in New Zealand's trading partners continued to expand.

"Growth in the Asia-Pacific region remains strong, and growth in the US and UK has turned out a little stronger than was projected," he said.

Consistent with this, export commodity prices, which were already very high, are continuing to increase. While this was encouraging, downside risks to global growth and export prices persisted.

"Repairs to earthquake damage in Canterbury are expected to add to GDP growth over the projection period. The earthquake appears to have caused about $5 billion of damage to infrastructure, and residential and commercial property.

"While the near-term outlook for GDP growth has softened, beyond this, higher export volumes and earthquake repairs are expected to push GDP growth above that projected in the September Statement.

As growth recovers, current spare capacity will gradually be used up, causing underlying inflation to pick up. More immediately, the recent increase in the rate of GST will cause headline CPI inflation to spike higher temporarily, although there is little evidence of this spike affecting price and wage setting behaviour.

"While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing.

"The New Zealand dollar has appreciated significantly since the September Statement. Sustained strength in the currency is inhibiting the rebalancing of economic activity towards the tradable sector.

Accelerated elimination of New Zealand's fiscal deficit could help improve national savings, thereby easing current pressure on interest rates and the New Zealand dollar, and reducing New Zealand's dependence on international borrowing."

"The local recovery continues to frustrate, for the most part, and renewed global uncertainties also argue for the RBNZ to sit with its stimulatory 3 per cent OCR setting for the near future," said Mike Jones, strategist at Bank of New Zealand, before the statement was released. "The Reserve Bank could start up again in March, as remains our core view, or conceivably wait until June."

The bank pared its forecast for the 90-day bank bill, having already shaved more than a percentage point from projections in the second half of 2011 in the previous statement, and is predicting it will stay sub 4 per cent until the June quarter in 2012.

See a history of the OCR here.

With BUSINESSDESK