The US credit rating downgrade triggered immense market volatility over the past week. The downgrade itself was not really the key concern to market participants.

Indeed, the downgrade did not stop investors piling into US Treasuries over the past week.

Rather, the downgrade triggered a reassessment of the US (and global) growth outlook by equity markets, and growing scepticism about the ability of politicians to fix America's fiscal problems. The result was fear and panic, which underpinned a wild ride for global markets, with equities posting huge losses and recoveries on a daily basis.

On Wednesday morning, the Federal Reserve's promise to hold interest rates at very low levels until mid-2013 finally brought some calm to the US market. Despite all of the volatility, the Dow Jones lost just 1.5% over the week.

Midweek, focus turned to Europe's troubles and its own lack of political consensus in solving the Eurozone sovereign debt crisis. The market started to fret about the high levels of debt held by Italy and Spain. Meanwhile, rumours that France was also about to be downgraded saw increasing scrutiny on the financial health of the country's banks, and the market was unimpressed by the level of exposure to Greek debt. It is becoming increasingly clear that the EU-IMF bailout measures to date have been insufficient to calm market concerns of contagion in the Eurozone sovereign debt crisis and a more comprehensive and final solution is needed.

The RBNZ's removal of the post-earthquake insurance cut, originally penciled in for September, is contingent on current global financial risks receding and the economy continuing to recover. Financial market risks have grown substantially over the past week and the outlook for market financial volatility now largely rests with developments in Europe. It is still possible (albeit optimistic) that Europe's politicians will come up with a speedy and comprehensive solution that allays fears about European solvency and that global markets return to a state of serenity. But for a September OCR hike to still occur, such an outcome would have to be quick to give the RBNZ confidence that global financial risks are lower than they were on July 28. Reflecting this, we have pushed out our forecast of a 50 basis point hike (removal of insurance) to December.

Financial market volatility is not the only concern. US and European growth indicators were starting to soften even prior to markets becoming volatile. Beyond the volatility, the RBNZ may also need more time to assess the outlook for global growth, particularly if its wants to be confident the slowdown in US and Europe has not significantly affected momentum in emerging Asia.

Beyond December's hike, the high level of the NZD (once risk aversion has receded) will see the RBNZ hold off further OCR increases until mid-2012. We now expect the OCR to gradually rise to 4%. That peak is lower than our previous view (4.5%), largely due to an expectation of a higher NZD/USD over 2012 (see chart of the week below).