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Reserve Bank governor Alan Bollard has put the official cash rate on ice, keeping it at 2.5%.
The official cash rate been slashed by a total of 575 basis points since last July where it had been sitting at 8.25% since September 2007.
Despite deciding to keep it on hold, Bollard on Thursday said the the OCR could still go modestly lower in coming quarters and will stay at or below current levels until the latter part of 2010.
"We are now seeing some signs of financial conditions improving... but the recovery is likely to be slow and fragile," says Bollard.
Opinion among economists had been divided on whether the bank should continue cutting the official cash rate (OCR), with some believing a cut is necessary to stem the rising Kiwi dollar and falling export prices, and others saying a cut is largely futile and will do nothing to help bring down interest rates.
Earlier this week a Reuters poll of 16 economists showed six picked no change, eight predicted a 0.25% cut and just two thought Bollard would take more drastic action and cut it by 0.5%.
None of the economists polled predicted Bollard would raise the OCR.
In a prelude to Bollard's announcement the Finance and Expenditure Select Committee released a report on Wednesday outlining MPs' concern that banks had not passed on the full cuts in the OCR to borrowers.
Cuts to the OCR have seen banks lower their short term interest rates but just two banks, Westpac and ANZ National, reduced their floating rates.
Long term interest rates have seen little movement, and some have even gone up.
Banks have consistently maintained that longer term interest rates reflect the high cost of borrowing offshore rather than changes to the OCR.
Bollard on Thursday said that there was still room for banks to lower short term interest rates.
He says banks have a responsibility not only to shareholders, but more importantly the New Zealand economy to help its recovery.
Spike in housing market unsustainable
The Reserve Bank also raised doubts about the sustainability of the upturn in the housing market during the past few months.
According to industry contacts, it seemed that with housing turnover so low through 2008, a backlog of house buyers developed, the monetary policy statement said.
With mortgage rates now at historical lows, and many buyers believing price declines would be more limited in the future, house sales had increased. A surge in net permanent and long term immigration could also be a factor.
"Nonetheless, while improved housing market turnover may well continue for the next couple of months, we expect the pick-up ultimately to be short lived, and dominated by the risk of unemployment and high debt levels facing households," the statement said.
At the same time it said that while the recent consolidation was not expected to flow through to a quick or large rebound in house prices, residential investment was expected to recover in 2010.
US-led recovery
Bollard says the Kiwi dollar's increasing strength against the US dollar has created an "unhelpful tension" with the Reserve Bank's forecasts but he does not believe intervening in the currency will help.
The Kiwi dollar jumped around a half cent following the OCR announcement to trade at around 63 US cents.
Last week it reached an eight-month high of nearly 66 US cents.
Bollard says the exchange rate is largely being set by the need in the US to fund its government debt, and that in turn is driving international exchange rate moves at the moment.
"New Zealanders have got to get by as best they can," Bollard said.
He says some say it may be a case of a US recovery first and "other countries get in line".
Whatever the case, he says recovery will be volatile.
He says other monetary tools available to the Reserve Bank other than the OCR would be used only if New Zealand's financial stability was at stake.
