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NZ interest rate unchanged at 3 pct

Contributor:
Fuseworks Media
Fuseworks Media

Wellington, Sept 16 NZPA - Many economists are expecting the official cash rate (OCR) to stay at 3 percent for the rest of 2010, with the Reserve Bank leaving it unchanged today.

Explaining today's decision, Reserve Bank Governor Alan Bollard said that while global and domestic economies continued to recover, the outlook had weakened since June.

ASB economists said the Reserve Bank had revised down its growth forecast substantially.

In line with that, the Reserve Bank had also revised down its projection of underlying inflation.

"In particular, the RBNZ is hopeful that medium term inflation expectations will remain subdued in the face of a spike in headline CPI (consumer price index) over the coming year," the ASB economists said.

The Monetary Policy Statement (MPS), published by the Reserve Bank today, reflected a "huge" shift in the Reserve Bank's view of the recovery, even before the impact of the September 4 Canterbury earthquake was taken into account.

"In particular, the RBNZ has reinforced that the OCR is unlikely to climb substantially during the tightening cycle. This is in line with our view that the OCR will eventually peak at 4.5 percent," the ASB economists said.

They continued to expect the Reserve Bank would keep the OCR on hold for the rest of this year.

The MPS said today's policy decision allowed for the Reserve Bank's initial assessment of the Canterbury earthquake's economic impact, while Dr Bollard noted an interim decision to hold the OCR had been made the day before the quake, based on the strength of the New Zealand and world economy.

That decision had been reviewed after the quake, but nothing from the event had led the Reserve Bank to want to change its OCR judgement, or the communication around it, Dr Bollard said.

Understanding the effects of the earthquake throughout the economy was complicated.

"We've tried to clarify our thinking at the minute on that, but we do have to emphasise there's a heap of assumptions in there. There's a lot of questions about the data and how that will come through, and some of that will change over the next little while," Dr Bollard said.

"Based on what we've got currently, we saw no reason to change our decision to hold the OCR."

The MPS said that while gross domestic product was likely to be higher than it otherwise would be during the reconstruction period, in aggregate New Zealand was worse off, not better off as a result of the earthquake.

The strongest boost to activity from the September 4 earthquake was likely to be in construction, with rebuilding likely to be spread over a number of years.

The rebuilding in Canterbury would absorb a significant proportion of the excess capacity in the construction sector during the next 12 to 18 months, with most of the pressure in Canterbury but some likely across the whole country, the MPS said.

"The majority of the financial and wealth loss of the earthquake will be borne by central government and foreign re-insurance companies. Local government is also likely to bear a substantial cost," the MPS said.

Deutsche Bank chief economist Darren Gibbs said the MPS was consistent with his view that no further increases in the OCR should be expected this year

Given the "dovish" tone in the MPS, the interim review next January would appear to be the earliest likely timing to restart raising the OCR, with the March MPS now marginally more likely.

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