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Source: ONE News -
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The Reserve Bank has kept the benchmark interest rate on hold at 2.5%.
In a decision widely expected by the market, Reserve Bank governor on Thursday announced that the official cash rate would remain at the record low previously set in April.
In his accompanying statement Bollard said that despite signs of a levelling off in economic activity, New Zealand's economy remains weak.
"We continue to expect to see a patchy recovery get underway toward the end of the year, but it will be some time before growth returns to healthy levels," he said.
Bollard also acknowledged that the high New Zealand dollar was not helping the sustainability of future growth.
Since March the Kiwi has risen 35% against the US dollar.
"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," he said.
ANZ chief economist Nick Tuffley believes this shows the Reserve Bank has increased its willingness to cut the OCR in response to the higher Kiwi dollar.
Nevertheless, Bollard's decision will disappoint those exporter being hit by the high dollar.
Federated Farmers which was advocating a dramatic 50-basis point cut to try and shake the dollar, saying the domestic economy is yet to feel the impact of sharply reduced export returns.
Following the announcement the Kiwi fell a modest half a cent on Bollard's sentiment.
ANZ National chief economist Cameron Bagrie says the problem is that New Zealand has a "two-toned" economy.
"We know the rural sector is under a lot of stress but conversely you've got the property market picking up quite strongly, and we all know that that's the Reserve Bank's nemesis historically," he says.
He says improved sentiment across the property market instead made a strong case for the Reserve Bank to hike rather than reduce rates.
Bagrie says it is important to remember that since the central bank cut the OCR in April, the dollar has climbed steadily ever since. This is because the dollar is currently driven by a "global story", which means any cuts to the OCR could be ineffective.
"There's a one-for-one correlation with global equity market indices. If they're moving up, generally risk sentiment is on and you start to buy the peripheral nations (i.e. Kiwi dollar)," he says.
Bagrie says the dollar's value may eventually return to a "domestic fundamentals story" but it is a matter of timing.
Bollard said wholesale interest rates are also higher than forecast, though overall economic growth was broadly in line with its forecast, and annual CPI inflation was safely within its target band.
The Reserve Bank says there could still be small cuts to the OCR over the coming quarters.
It also expects to keep the OCR at or below 2.5% through until the latter part of 2010.
To read business editor Corin Dann's blog on the decision, CLICK here.
