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Bollard keeps OCR unchanged

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Fuseworks Media
Fuseworks Media
Alan Bollard
Alan Bollard

Reserve Bank Governor Alan Bollard today left benchmark interest rates unchanged, as widely expected, while saying rates were "likely to increase modestly over the next two years".

Keeping the official cash rate (OCR) at 3 percent, Dr 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.

"Forward indicators of activity have firmed somewhat. Trading partner activity continues to expand and New Zealand's export commodity prices have increased further," Dr Bollard said.

"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."

As expected, the rise in the rate of GST in October had caused headline consumer price index inflation to spike higher, but underlying inflation remained comfortably inside the target band, Dr Bollard said.

"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 Reserve Bank's target is to keep annual inflation within a 1-3 percent band on average over the medium term.

It 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.

Earlier this week, the ASB said recent data had suggested little urgency for the Reserve Bank to resume the reduction of monetary policy stimulus, with ASB not expecting a lift in the OCR until September.

Data for November had confirmed that the underlying trend in retail spending remained subdued, and while housing activity had picked up in late 2010 from extremely weak levels in October, the market remained "frail", ASB said.

Despite that, it considered the Reserve Bank's forecasts for inflation made in December to be optimistic, and expected the Reserve Bank to become less comfortable with the inflation picture during the coming year.

Also earlier this week, BNZ said it may well shift its next-rate-hike call to September, from June, but it warned of the risk of "significant crunch points" later this year.

Any number of global issues could get right out of hand, and if things turned nasty in the wider world then this country's economic recovery would be further stifled.

Alternatively, a rare confluence of factors could "stoke a quickening of NZ GDP of stunning degree", BNZ said.

"This would just as rapidly put pressure on the economy's limited supply potential, particularly where the labour market is concerned, fuelling higher inflation.

"This would have the RBNZ hiking by more than it currently envisages, in all likelihood much more."

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