Alan Bollard

Wellington, July 30 NZPA - The Reserve Bank left the official cash rate (OCR) unchanged at a record low 2.5 percent, but made clear it was retaining the option to go lower particularly in light of the strength of the New Zealand dollar.

Concern is mounting that the strength of the currency could be too tough a hurdle for any patchy economic recovery. Yesterday Federated Farmers called for a "dramatic" cut in the OCR of 50 basis points, which it hoped might "shake" the dollar.

In his announcement today, Reserve Bank Governor Alan Bollard said that the level of the NZ dollar and wholesale interest rates were higher than assumed in the Reserve Bank's forecasts.

"The level of the dollar in particular is not helping the sustainability of future growth, and brings with it additional economic risks," Dr Bollard said.

"The forecast recovery is based on a further easing in financial conditions. If this easing does not occur, the forecast recovery could be put at risk. In these circumstances we would reassess policy settings."

The OCR could still move lower in coming quarters, he said.

"We continue to expect to keep the OCR at or below the current level through until the latter part of 2010."

Dr Bollard said the economy remained weak despite signs of a leveling off in economic activity.

"We continue to expect to see a patchy recovery get under way toward the end of the year, but it will be some time before growth returns to healthy levels.

"The outlook remains highly uncertain. New Zealand's merchandise exports are heavily weighted to soft commodities. As a result, New Zealand has not benefited to any significant extent from the rebound that has occurred recently in global hard commodity prices," he said.

Overall economic growth was evolving broadly in line with the Reserve Bank's forecasts, as the low OCR and stimulatory fiscal policy took effect.

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.

Some commentators are suggesting the Reserve Bank does not see further cuts to the OCR as appropriate, faced by the risk of a return to debt-driven consumption.

Earlier this month Dr Bollard said New Zealand was likely to emerge from recession earlier than others, but needed a weaker currency to drive growth and rebalance the debt-laden economy.

In the appeal for a 50-basis point cut, Federated Farmers economics spokesman Philip York said farmers needed relief given the current season would result in sharply reduced export returns, the impact of which was yet to be felt by the domestic economy.

The NZ dollar seemed high for all the wrong reasons, as money was sucked in to fund consumption.