Dial-back of monetary stimulus begins

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

The Reserve Bank raised its official cash rate from 2.5 per cent to 2.75 per cent yesterday. It had signalled since December last year that it expected to start removing an exceptional level of monetary stimulus "around the middle of 2010".

The June monetary policy statement includes an indicative forward track for short-term interest rates which show 90-day wholesale rates reaching 5.3 per cent by the end of next year and 6.1 per cent a year later.

This track is one of the ways the bank signals its intentions but, as ever, actual interest rate decisions remain hostage to fortune or as the bank puts it, "the further removal of stimulus will be reviewed in light of economic and financial market developments".

Financial contagion from sovereign debt concerns in Europe is seen as the main risk that could cause the bank to stall projected interest rate rises.

The New Zealand dollar rose on the Reserve Bank's decision, reaching US67.80c at 5pm, up from US66.15c on Wednesday.

See the text of Governor Alan Bollard's statement here.
See the full Monetary Policy Statement here.