Reserve bank holds fire on interest rates

WELLINGTON - Reserve Bank Governor Alan Bollard left interest rates on hold today following the bank's six-weekly review of the Official Cash Rate (OCR).

Since the start of last year, the bank has lifted interest rates seven times and Dr Bollard left the door open for further rate rises today while shutting it to cuts in the near future.

"Certainly, the current outlook offers no scope for an easing in the foreseeable future," he said.

The OCR, remains at 6.75 per cent. The prospect of rate rises rather than cuts is against growing evidence of a likely economic slowdown in the second half of this year.

Yesterday, the National Bank's monthly survey of business confidence showed a sharp downturn in confidence with more than half of businesses expecting conditions to deteriorate in the next six months.

Dr Bollard said the bank has been concerned about persistent inflation pressures and that had not changed even though the economy slowed in the second half of 2004.

"The data suggests underlying demand and inflation pressures remain strong. In this environment, further policy tightening cannot be ruled out."

Dr Bollard said recent Gross Domestic Product (GDP) data had been difficult to interpret. Several years of strong growth have led to productive resources becoming stretched, with capacity utilisation and measures of labour shortages remaining at record levels.

The softer than expected GDP data -- 0.4 per cent growth in the December quarter -- may have been affected by the capacity constraints and did not necessarily reflect a weakening of total demand.

"Recent indicators of demand support this view, with retail trade, housing market data and imports all remaining very robust."

Despite the National Bank survey and private sector bank forecasts of a slowdown, Dr Bollard said the RB expected some rebound in GDP growth in the second half of this year.

Although March quarter consumer price inflation was only 0.4 per cent, Dr Bollard said that had been influenced by temporary factors, particularly a fall in international air fares, and inflation pressures remained at least as strong as in the RB's March assessment.

"Underlying inflation pressures are persisting as evidenced by rising business costs and ongoing labour market tightness," Dr Bollard said.

The bank is counting on the seven earlier rate rises to slow demand and rein in inflation pressures.

Because more then two thirds of borrowers take out fixed loans, it takes longer for RB rate changes to affect the economy.

As borrowers have to refinance their two- and three-year loans they will have less discretionary spending and that should dampen overall demand.

The New Zealand dollar rose about a third of a cent to US72.35c within minutes of Dr Bollard's decision.

ASB economist Kate Skinner said the statement and commentary were as expected.

"RBNZ is still hawkish," she said, adding that it would depend on the data between now and June 9, when the RB next reviewed rates, as to whether there would be another rate rise.

- NZPA