Wellington, June 11 NZPA - Several economists are predicting no more cuts for the official cash rate (OCR), after Reserve Bank Governor Alan Bollard left it unchanged at 2.5 percent.
Announcing the decision today, Dr Bollard warned of the risk posed by the current strength of the New Zealand dollar.
"A stronger dollar at a time of weak global growth risks delaying or even reversing the projected increase in exports, putting the sustainability of recovery at risk," he said.
Immediately after the OCR decision the NZ dollar rose to US63.10c, from around US62.50c, and by about 2pm was up to US63.60c.
Dr Bollard also made it clear he saw room for more cuts to shorter term lending rates.
"Although rising longer term interest rates overseas are placing upward pressure on longer term lending rates here, there is room for further reductions in shorter term lending rates."
The OCR was at 8.25 percent throughout the year to last July before being brought down quickly as the global financial crisis hit the economy, with the last cut being a 50-basis point drop at the end of April.
In his statement today, Dr Bollard repeated comments from April that the Reserve Bank expected to keep the OCR at or below the current level through until the latter part of 2010.
ANZ said that while the Reserve Bank had left the door open for further cuts, lacking an offshore trigger, 2.5 percent looked to be the trough in the policy cycle.
"Absent a further material deterioration in economic prospects or a rise in systemic risks to the financial system, we believe this easing cycle is now over," ANZ said.
While it had considerable wariness towards the New Zealand economy, facing a structural rebalancing process, there were some aspects of the economic cycle policy could not and should not respond to.
ANZ said it was siding with the Reserve Bank in viewing that recent tensions, and a rising currency, would not last long.
Deutsche Bank chief economist Darren Gibbs said the Reserve Bank's easing cycle was now most likely at an end, barring either a significant further downturn in global or domestic economic indicators, or a further unwarranted tightening of financial conditions.
But he thought the tightening cycle would start sooner than the Reserve Bank was indicating, and continued to factor in a rise of 50 basis points next June.
Goldman Sachs JBWere New Zealand strategist Bernard Doyle said that while the Reserve Bank had left the door open for further cuts, Goldman's view was that would not be needed.
The Reserve Bank's decision to not directly address concerns about the exchange rate through the OCR was appropriate, he said.
The central bank was also continuing to show a "thinly veiled annoyance at margin padding in the banking system".
"In our view, the RBNZ has done the right thing by standing pat," Mr Doyle said.
"We agree that it is too early to judge how sustainable the signs of life in the NZ domestic economy are. But it would be greater folly to ignore their existence."
ASB economists Nick Tuffley and Jane Turner said the threshold for further OCR cuts was higher than they previously thought, but they had pencilled in two 25-basis point cuts for September and October, depending on the NZ dollar.
The Reserve Bank's assumption of a weak medium term NZ dollar trade weighted index skewed the risks to its forecasts strongly one way.
If the currency remained at current levels on the back of US dollar weakness, which was ASB's core scenario, inflation pressures were likely to be weaker than the Reserve Bank was assuming, and monetary conditions would be tighter for the export sector, the ASB economists said.
"Easier monetary conditions will have to be delivered via lower interest rates -- which is why we expect the next move in the OCR to be a cut, not a hike."
TD Securities senior strategist Annette Beacher described the decision to pause at 2.5 percent as "unwelcome".
The NZ dollar was too high a nd today's pause would only spur it to greater heights.
"We remain of the view that cash rates are more likely to be lower than higher in the next 12 months," she said.
"Unless the data consistently surprise on the upside, we will leave our terminal cash rate of 2 percent on the table."
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