Interest rates held

Reserve Bank governor Alan Bollard

The Reserve Bank left the official cash rate unchanged at 6.50 per cent today.

The rate was lifted six times in 2004 and the bank's governor Alan Bollard said today that past rate increases and the high value of the dollar should slow the economy. He said there was no scope for cuts in the near future.

Dr Bollard said inflation was expected to average between 1 and 3 per cent in the medium term.

He added: "Economic developments are generally proving at least as strong as we anticipated, although a slowdown is still expected over the year ahead. Inflation has risen to close to 3 per cent and is expected to remain around this level before easing back later in 2006."

He warned of a danger of inflation from rising wages given a persistent labour shortage, and changes in US dollar and interest rates.

"There is little headroom to absorb stronger than expected inflation pressures," Dr Bollard said. "If such pressures emerge, a further policy tightening cannot be ruled out. Further, the current outlook offers little scope for an easing in policy in the foreseeable future."

The next cash rate review will be in March.

In December, the bank forecast economic growth would slow from 4.25 per cent in the March 2004 year to 2 per cent a year later.

Inflation, which was 2.7 per cent in 2004, is expected to remain close to 3 per cent until easing back later in 2006.


Westpac chief economist Brendan O'Donovan said Dr Bollard's message was little changed from that in December.


"We've still got a Reserve Bank that's got inflation towards the upper end of its target band and domestic activity continuing to be reasonably strong," Mr O'Donovan told NZPA today.


"They (the RB) are still talking tough. There's more likelihood of tightening than anything else," he said.


Today's OCR call meant "zip" to people with mortgages and they could expect interest rates to "most likely stay where they are".


The New Zealand dollar was trading at US71.80c shortly before Dr Bollard's statement.

The New Zealand dollar's cross rates with both the United States and Australian currencies slipped lower on Dr Bollard's comments.

At 9.05am, the kiwi was buying US71.67c (from US71.77c at 8.55am), while against the aussie it was at A92.66c (92.82c).

- HERALD STAFF, NZPA