Alan Bollard

Wellington, July 29 NZPA - The Reserve Bank lifted the official cash rate 25 basis points to 3 percent, as widely expected, but indicated the pace of further rate rises may be slower than suggested earlier.

Today's increase followed a 25-basis point rise seven weeks ago which lifted the OCR off a record low 2.5 percent where it had been for 13 months.

Reserve Bank Governor Alan Bollard said some further removal of monetary policy stimulus was appropriate now, with the level of the OCR still "very supportive" of economic activity even after today's move.

But he also said the pace and extent of further OCR increases was likely to be more moderate than was projected in the Reserve Bank's Monetary Policy Statement on June 10.

The June statement said it was appropriate to gradually remove policy stimulus, given that gains in export volumes and an eventual recovery in residential and business investment were expected to see GDP growth remain robust over the projection period.

Today Dr Bollard said the outlook for economic growth had softened somewhat, but it was still appropriate to continue to reduce the "extraordinary level" of support implemented during the 2008/09 recession.

"The world economy continues its fragile recovery. Trading partner growth has turned out stronger than we predicted, however, future prospects for growth have deteriorated. While still at high levels, our commodity prices have moderated," Dr Bollard said.

In this country, domestic demand was subdued.

"Households are cautious, with retail spending growing only modestly, housing turnover in decline and household credit growth weak."

While that caution had been evident for some time, recent slowing in net immigration would further dampen consumer spending. Business investment continued to be very low, with corporate lending remaining subdued.

The appreciation of the New Zealand dollar in recent weeks was inconsistent with the softening in this country's economic outlook and moderation in its export commodity prices, Dr Bollard said.

"Overall, we continue to predict respectable near-term GDP growth, with manufacturing confidence remaining elevated and forestry exports continuing to expand. An eventual recovery in business investment will assist growth over the medium term."

Dr Bollard reiterated the Reserve Bank's expectation that the coming rise in GST and other government-related charges would not have a lasting impact on inflation.

"However, the price and wage setting behaviour of firms and households will be monitored for evidence of any increase in inflation expectations," he said.

The Reserve Bank expects annual consumer price index inflation, which has been near 2 percent for the past five quarters, to temporarily push above 3 percent.