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No OCR change appropriate 'for now' - new governor

Published: 5:46AM Thursday October 25, 2012 Source: ONE News

The new Reserve Bank of New Zealand Governor has stuck to the expected script and left the Official Cash Rate (OCR) on hold today.

Graeme Wheeler, in his first OCR review since taking over the top job from former RBNZ Governor Dr Alan Bollard, kept the rate at 2.5%.

Wheeler said that the rate remains appropriate "for now" and brought inflation back in focus. Last week, Statistics New Zealand announced that the annual pace of inflation was 0.8%, which is well below the RBNZ's target band of between 1% and 3%.

The RBNZ's rate provides an indicator for floating mortgage rates as the major banks often time their changes around the OCR's six-weekly reviews.

Wheeler said that the RBNZ expects inflation will head back toward the middle of the target range.

"We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months," Wheeler said.

"For now it remains appropriate for the OCR to be held at 2.5%."

The New Zealand dollar traded at 82 US cents shortly before the OCR announcement, from 81.26 cents at 5pm in Wellington yesterday.

'Modest' economic growth

Wheeler is a former executive at the World Bank and most recently ran a consultancy in the US.

He has signed a Policy Targets Agreement (PTA) with Finance Minister Bill English that is broadly unchanged from the one inked by his predecessor.

Still, he said at the time it was signed last month that tweaks to the PTA gives the bank more authority "to lean against the build-up of financial imbalances" in the economy.

New Zealand is going through "modest" economic growth, with the Canterbury rebuild boosting the construction sector and housing market activity increasing as expected, Wheeler said.

Those gains were being hampered by fiscal consolidation and a strong New Zealand dollar "undermining export earnings and encouraging substitution toward imported goods and services," he said.

Wheeler was more upbeat about the global outlook, saying the risks appear "more balanced" on improving market sentiment. Still, the global economy remains fragile with "further recovery dependent on policy implementation."

That compares to Bollard's past two statements that cited the weak outlook for New Zealand's trading partners with on-going woes of the Eurozone and slowing Chinese growth, and modest local growth locally.

Economists and markets were divided on how Wheeler would approach monetary policy, with a Reuters survey of economists unanimously predicting no change, and traders giving a rate cut a 30% chance.

"Anything could happen because he is a new man and we don't know his character," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland before the release.

Last month, the central bank trimmed its forecast for the 90-day bank bill rate, often seen as a proxy for the OCR, with the rate on hold until December next year and rising to 3.3% in March 2015.

It had previously seen the rate unchanged at 2.7% until June 2013, before peaking at 3.4% in March 2015.

The OCR will be reviewed again in six weeks' time.