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RB leaves cash rate unchanged

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Fuseworks Media
Fuseworks Media
Alan Bollard
Alan Bollard

Wellington, Dec 9 NZPA - The Reserve Bank left the official cash rate (OCR) unchanged at 3 percent today as growth continues to moderate, but rebuilding following $5 billion worth of earthquake damage in Canterbury is expected to help boost the economy.

In his statement accompanying the rate announcement today, Reserve Bank Governor Alan Bollard said corporate investment intentions were now below average and household spending remained weak.

But, while the near term outlook for growth in gross domestic product had softened, beyond that higher export volumes and earthquake repairs were expected to push GDP growth above levels that had been expected previously.

The Reserve Bank estimated the cost of residential rebuilding from the Canterbury earthquake at $3 billion, and assumed damage of $1 billion to commercial buildings and $1 billion to infrastructure.

"While this damage is obviously undesirable, offshore based reinsurers are likely to bear the majority of the cost of repairs and reconstruction. The majority of property is insured and underinsurance is quite limited," the Reserve Bank's quarterly Monetary Policy Statement (MPS), published today, said.

So far only a small amount of reconstruction had been done, but construction sector activity in the Canterbury region would increase substantially. Repairs to residential property and infrastructure were likely to be spread over at least the next two years, with repairs to commercial property likely to be even more drawn out.

Given the large amount of spare capacity in Christchurch city, it was possible some businesses may relocate rather than rebuild, the bank said.

It was thought rebuilding would peak at the end of 2011, when the level of residential investment would be lifted by nearly 20 percent relative to non-earthquake related residential investment.

While the construction sector had a great deal of spare capacity, that would be absorbed rapidly and the cost of construction and materials was likely to rise, as were accommodation costs in Canterbury, driven by an influx of labour.

The short term disruption to household and business activity following the earthquake was estimated to have reduced GDP growth by 0.1 percent in the September quarter, the bank said.

Overall, annual average GDP growth was likely to be below 2 percent for most of 2011, about 1 percentage point less than the Reserve Bank had predicted in September.

By the middle of 2012, gains in export volumes along with the earthquake repairs were expected to see GDP growth accelerate to almost 4 percent, about 1 percentage point above that previously predicted.

Dr Bollard said activity in this country's trading partners continued to expand, with growth in the Asia-Pacific region remaining strong, and growth in the United States and Britain turning out a little stronger than projected. Export commodity prices, which were already very high, had continued to increase, although downside risks to global growth and export prices persisted.

"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," Dr Bollard said.

The MPS also repeated the bank's concerns about the strength of the New Zealand dollar, saying sustained strength in the currency was inhibiting rebalancing of economic activity towards the tradable sector.

"In particular, continued strength of the New Zealand dollar is restraining tourist spending and further undermining the ability of the manufacturing sector to compete with imports."

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