Official interest rate on hold at 2.5 per cent

Thursday, 26 January 2012 08:28

The Reserve Bank has left interest rates unchanged this morning, with Governor Alan Bollard warning that New Zealand banks will face higher funding costs over the coming year.

Dr Bollard painted a picture of a gradually improving New Zealand economic landscape, with little inflation, but with threats from global uncertainty remaining.

He gave no clear signal as to when the official cash rate (OCR) would be raised, with only subtle hints that the next move was likely to be up.

"Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5 per cent."

The OCR influences borrowing costs, especially the floating rate mortgages which are being used by the majority of households.

Most economists expect the OCR to be left on hold until at least September, and possibly longer, before gradual increases to help contain inflation.

Bollard said that since the Reserve Bank's last statement in December, international markets had improved "slightly", with increased liquidity in European markets. However the global situation remained "fragile", with threats to New Zealand's trading partners.

While he did not say the New Zealand dollar was overvalued, as he has in recent statements, Bollard said the recent rise was cutting income to exporters.

"World prices for New Zealand's export commodities have remained elevated but the recent appreciation of the New Zealand dollar is reducing exporters' returns. The European debt crisis has also increased the cost of international funding, which will likely pressure funding costs over the coming year."

The New Zealand economy was continuing to show signs of growth, although there was a warning that the rebuild of Canterbury, expected to give a major stimulus, could be delayed by continued aftershocks.

"In the domestic economy we continue to see modest growth. Over recent months there have been signs of a limited recovery in household spending and the housing market. Further ahead, repairs and reconstruction in Canterbury will also provide a significant boost for an extended period, though there may be further delays resulting from the aftershocks."

Bollard said inflation pressures had remained "well contained", with it below 2 per cent.

Last week Statistics New Zealand said the consumer price index had fallen to 1.8 per cent in the final three months of 2011.

The Reserve Bank's target band is 1-3 per cent, leading to some calls for the OCR to be reduced.

Economists said while the lower inflation reading gave the Reserve Bank greater flexibility to cut interest rates, this should be kept in reserve in case the global economy worsened and bank funding costs soared.

The New Zealand dollar remained unchanged, at 81.83c, shortly after the announcement.

Sourced from: www.stuff.co.nz