Reserve Bank governor Alan Bollard has stuck to the script this morning and done what the market expected, leaving the Official Cash Rate steady at a record low 2.5 per cent.
"Despite signs of a levelling off in economic activity, the economy remains weak. We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels," said Bollard in a statement this morning.
"The outlook remains highly uncertain. New Zealand's merchandise exports are heavily weighted to soft commodities. As a result, New Zealand has not benefited to any significant extent from the rebound that has occurred recently in global hard commodity prices.
The level of the New Zealand dollar and wholesale interest rates were higher than assumed in forecasts, said Bollard.
"The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks.
The New Zealand dollar slipped against a broadly strong greenback ahead of the Reserve Bank's decision.
By 7.30am today the kiwi was buying US65.47c, down from US65.85c at 5pm yesterday.
"We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy," said Bollard. "The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010."
ASB bank chief economist Nick Tuffley said the Reserve Bank had this morning been "very upfront on the risks presented to economic outlook due to the higher New Zealand dollar."
Bollard, in his statement, had signalled an increased willingness to cut the OCR in response to the high dollar.
Tuffley said the bank "chose to send a very clear message to markets today, removing all mention of green shoots and/or upside risks stemming from net migration and housing."
"The Reserve Bank has again reiterated that it is likely to keep the OCR on hold for an extended period, and beefed up its easing bias compared to the June Monetary Policy Statement," he said .
"While rays of sunshine are appearing around the globe, for New Zealand there are still dark clouds hanging over its export sector," said Tuffley.
"We retain our view that the Reserve Bank will cut the OCR by 25bp (0.25 per cent) in both September and October to try and engineer some easing in monetary conditions - a view obviously contingent on the New Zealand dollar and wholesale rates remaining elevated."
Federated Farmers spokesman Philip York said the continually high New Zealand dollar was a headache for farmers and exporters.
Given that the Federated Farmers latest farm confidence survey showed farmers were more pessimistic, a dramatic 50 basis points cut to the OCR could "shake the dollar to more realistic levels."
He said farmers were asking Bollard to use everything in his toolbox to tackle interest rates and the high dollar.
"The high kiwi dollar is a symptom of how imbalanced the New Zealand economy has become. At a time when private credit growth has slowed sharply, Government borrowings are set to grow in order to fund the deficit. This will add upwards pressure on the New Zealand dollar," said York.
Clearly something has to give and for far too long that has been the tradeable sector. The needs of the productive economy must be put first if New Zealand is to generate real growth and real jobs.
York said it was about time New Zealand stopped following the lead of the Australian dollar and "let the world see we are two different countries with different economies."
Senior economist at UBS New Zealand Robin Clements said Bollard's commentary was "more dovish" than expected.
"Critically, on the day, the Reserve Bank left the possibility of yet lower rates ahead on the table…" said Clements.
By leaving this possibility of even lower interest rates, the Reserve Bank had "successfully avoided a further tightening in monetary conditions, which is clearly not something it is seeking at the moment."
Clements said he believed the OCR would stay at 2.5 per cent until the third quarter of next year - "…at which time the Reserve Bank will start the process of moving rates away from stimulatory levels."
Goldman Sachs JBWere strategist Bernard Doyle the " broad swathe of indicators suggesting New Zealand is emerging from recession made a rate cut a long shot in our view".
"The Reserve Bank acknowledged signs of recovery, but somewhat begrudgingly: "We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels."
Around the level of the dollar, the bank continues to express its concern, but has become more aggressive in its rhetoric.
Bollard's statement contained an implicit threat that further dollar strength will be met with a rate cut.
Doyle said the future path of interest rates would ultimately be decided by the pace of recovery in the domestic economy.
"Accordingly the signs of life we are currently seeing, in our view, make a rate cut unlikely, and we remain comfortable with our first tightening occurring mid-2010. "
Yesterday Federated Farmers called for a "dramatic" cut in the OCR of 50 basis points, which it hoped might "shake" the dollar.
In the appeal for a 50-basis point cut, Federated Farmers economics spokesman Philip York said farmers needed relief given the current season would result in sharply reduced export returns, the impact of which was yet to be felt by the domestic economy.
The NZ dollar seemed high for all the wrong reasons, as money was sucked in to fund consumption.
NZ HERALD STAFF/NZPA
Interest rates stay low - Bollard sticks to the plan
Graphic / Christoph Lukasser
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