Reserve Bank leaves rates unchanged

9.08am

The Reserve Bank of New Zealand has left its benchmark interest rate unchanged at 5.00 per cent, although it warned of a rate hike in the medium term.

The central bank said in a statement today that the official cash rate at 5 per cent was still able to hold inflation within its target range of between 1 per cent and 3 per cent.

Inflation remains steady at 1.5 per cent, although Reserve Bank Governor Alan Bollard has warned it is likely to rise to just below the ceiling within two years.

A booming house market, fuelled by continued net migration and low mortgage rates, is currently being balanced by a weaker export sector.

Housing makes up 20 per cent of the inflation-measuring Consumer Price Index. The New Zealand economy has remained relatively buoyant -- with low unemployment, strong consumer spending, and now rebounding commodity prices and business confidence -- while the world economy struggled to boost growth rates.

Raising interest rates, making money more expensive to borrow, should take some strength out of domestic demand when inflation begins to climb.

"As noted in our September monetary policy statement, the New Zealand economy has been enjoying strong economic growth, with robust domestic demand countering weaker conditions in parts of the export sector," the Reserve Bank said.

"Strong inflation pressures are evident in some industries, although these pressures have to date been largely offset by weaker imported inflation.

"In saying that, the bank reiterates that its headroom to absorb additional inflation pressures over the medium term is limited. The current market expectations of interest rates appear broadly consistent with this view as currently reflected in financial market prices.

"The bank will continue to assess activity and inflation pressures accordingly, as new information comes to hand."

The bank is expected to raise interest rates by the middle of next year.

Exporters, unions and some political parties have called for the bank to cut interest rates to at least the same level as our key trading partner Australia, where the benchmark rate is 4.75 per cent.

Exporters are unhappy about the strong New Zealand dollar, which is currently at near-six year highs against the United States dollar, although it remains at more moderate levels against the Australian dollar.

Higher interest rates in New Zealand than in other developed economies have helped fuel the currency as offshore investors take advantage of the better yield. Weakness in the US dollar, where rates are at a 45-year low, is also making New Zealand attractive.

Despite a worsening balance of payments deficit -- currently the largest in six years -- the Reserve Bank is not expected to lower rates. The bank has cut interest rates three times in the last year to stimulate demand in the face of a weak world economy.

It releases its next rate review on December 4.

- NZPA