KEY POINTS:
Reserve Bank governor Alan Bollard today kept the Official Cash Rate (OCR) steady at 8.25 per cent.
Dr Bollard said economic conditions in New Zealand had "deteriorated somewhat" since the last OCR in January.
He was quick to throw the spotlight on weaker prospects for world growth, tighter credit conditions, a sharper-than-expected slowing in the housing market, and recent dry weather conditions.
Dr Bollard said inflation is likely to remain uncomfortably high for the Reserve Bank in the medium term, blaming a tight labour market, strength in commodity prices, and the impact of announced government spending plans and assumed personal tax cuts.
"All these will add to inflationary pressure.
"There is more uncertainty than usual at present, with downside risks to activity and upside risks to inflation.
"The main downside risks are a further deterioration in the world economy, tighter credit conditions, and the potential for a more severe downturn in the housing market. Conversely, further strength in labour costs, additional fiscal stimulus, and high inflation expectations represent key upside risks to underlying inflation", said the Reserve Bank governor.
"Given this outlook, we expect that the OCR will need to remain at current levels for a significant time yet to ensure inflation outcomes of 1 to 3 per cent on average over the medium term."
Private sector economists assessed Dr Bollard's quarterly statement as in line with the December economic review and essentially neutral in tone. They said the lower growth forecasts were realistic.
"There's no good news out there," said independent economist Donal Curtin.
Bank of New Zealand economist Mark Walton said the statement was "pretty well balanced".
"They are still talking about a significant amount of time on hold, but reading between the lines you'd have to say they've come back from their tightening bias a reasonable amount," he said.
"Our impression is that they've moved pretty much to neutral."
ANZ-National Bank chief economist Cameron Bagrie said the key phrase that rates would stay on hold for some significant time, showed that the Reserve Bank's hands were tied.
"They have easing growth and still high inflation so they have little room to move."
UBS senior economist Robin Clements said the Reserve Bank had hit the spot in keeping rates leaning against inflation pressures.
"There hasn't been a lot of change in the guidance, but beneath that they state openly that the outlook for growth has deteriorated," he said.
"In that sense things are a little bit less hawkish but the bias is still towards tightening."
From around US79.80c at 9am, the New Zealand dollar rose to above US80.20c within 30 minutes of the announcement.
On Tuesday, Australia's Reserve Bank raised its official cash rate by 25 basis points to 7.25 per cent to follow up a similar hike last month.
Meanwhile, the US Federal Reserve has cut its lending rates by 2.25 percentage points since mid-September to 3 per cent and markets have priced in a 74 per cent chance of a further 75 basis point on March 18.
- NZHERALD STAFF, with NEWSTALK ZB and NZPA
