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NZ interest rate unchanged at 3 pct

Contributor:
Fuseworks Media
Fuseworks Media
Alan Bollard
Alan Bollard

Wellington, Sept 16 NZPA - The Reserve Bank has left official interest rates unchanged at 3 percent, taking into account the Canterbury earthquake and a softening outlook for economic growth.

The official cash rate (OCR) had been held at a record low 2.5 percent from April 2009 to June this year as the Reserve Bank sought to counter the impact of the global financial crisis.

In both June and July the OCR was lifted 25 basis points as the world economy showed signs of continuing recovery.

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

The Canterbury earthquake had significantly disrupted economic activity and was likely to continue to do so for some time yet, Dr Bollard said.

Damage to assets due to the earthquake has been estimated at $4 billion.

In its September Monetary Policy Statement (MPS), published today, the Reserve Bank 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.

Goods exports were likely to be little changed as a result of the earthquake, although tourism could feel some negative impact if visitors were discouraged.

Imports of construction materials and consumer durables would be higher, meaning a boost to GDP was likely to be less than the overall lift in domestic spending.

The financial cost of the earthquake to most households would be covered by the Earthquake Commission (EQC)and private insurance, with most businesses also insured for both business disruption and physical damage.

Domestic insurance companies should be relatively well insulated given most of their payouts would be covered by re-insurance, 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 Reserve Bank said September quarter GDP growth could be about 0.3 percent lower than otherwise would have been the case, although it acknowledged considerable uncertainty around the estimates of the earthquake's impact on GDP.

Growth in the December quarter would be higher as economic activity recovered and rebuilding got under way, with a further lift likely in the March quarter.

GDP could be half to 1 percent higher in March 2012, depending on how much activity was displaced and how much of the extra activity was met out of imports.

"It is important to note that while GDP is higher as a result of the earthquake, this extra activity reflects repairs to the capital stock, not a net improvement in the wealth of New Zealanders."

The impact on the current account of higher imports was likely to be partly or fully offset by payments received from foreign re-insurance companies, the MPS said.

The financial account would also see increased inflows as the EQC liquidated some of its foreign asset holdings.

The MPS also noted that despite signs of a weakened global outlook, New Zealand's export commodity prices remained "very strong".

Farm incomes would soon benefit substantially from those higher earnings but, partly because of the implied temporary nature of current high prices, it seemed likely farmers would continue to attempt to pay off debt rather than increase spending.

The outlook for household spending had deteriorated since June. While retail spending and household credit had continued to grow modestly, persistent housing market weakness suggested private consumption would not improve to the extend previously projected, the MPS said.

Dr Bollard said the pace and extent of further OCR increases was likely to be more moderate than was projected in the June MPS.

The New Zealand dollar lost about half a US cent immediately after the announcement.

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