Official Cash Rate held at 3pc

Reserve Bank Governor Alan Bollard Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard held the official cash rate at 3 per cent, this morning, and isn't planning to raise rates until the economic recovery is "more robust."

His decision was widely tipped by commentators after the bank signalled in December that the subdued economic recovery was likely to mean fewer rate rises.

Bollard said domestic economic activity had been weaker than forecast through the second half of 2010, with September quarter GDP declining unexpectedly, and retail spending appearing to have fallen in the December quarter.

In a statement just released Bollard said: "The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement.

"Domestic economic activity was weaker than forecast through the second half of 2010. September quarter GDP declined unexpectedly, and retail spending appears to have fallen in the December quarter.

"Forward indicators of activity have firmed somewhat. Trading partner activity continues to expand and New Zealand's export commodity prices have increased further. Within New Zealand, business confidence, across a range of industries, has picked up and imports of capital equipment have grown. Furthermore, there are tentative signs that housing market activity has stabilised, after having trended lower for some months.

"The recent increase in the rate of GST has caused headline CPI inflation to spike higher as expected, but underlying inflation remains comfortably inside the target band.

"As noted previously, 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 bank has held the OCR at 3 percent since August and in December scaled back its projected rate outlook, saying it expected future rises to be lower and slower.

A Reuters poll ahead of today's rate announcement found 15 of 21 analysts expecting the first rate rise in June or later, compared to late 2010 when a clear majority had been expecting tightening to start in March. Market watchers consistently priced in no chance of a hike today.

The central bank's wait-and-see approach mirrors that of the Federal Open Market Committee in the US which kept its benchmark interest rate in a near-zero band, and maintained the size of its US$600 billion asset purchase plan.

Bollard will tomorrow offer his big-picture view of New Zealand's economy when he gives his opening speech for the year at the Canterbury Chamber of Commerce. The speech is entitled 'Looking into the crystal ball: A forecast and some risks ahead.'

- NZ HERALD ONLINE / BusinessDesk / NZPA