OCR unchanged but cut likely later 

The Reserve Bank has left the Official Cash Rate unchanged, at 8.25%, but hasn't ruled out a rate cut later this year.

Reserve Bank Governor Allan Bollard has decided to maintain the status quo keeping the OCR - introduced in July last year - at 8.25%

He says the bank hasn't cut rates yet due to concerns with domestic inflation

"The global economy is currently experiencing significant increases in oil and food prices. These price increases are occurring at the same time as activity is weakening in many economies in response to the global credit crisis and slowing housing markets. In New Zealand, this confluence of factors is producing a challenging environment of weak activity and high inflation," says Bollard.

However, the bank is signalling a cut later this year due to the weakening economy.

Bollard says that if the economy evolves in line with the Reserve Bank's projections it is likely to be in a position to lower the OCR later this year.

"It's pretty encouraging. It looks like the Reserve Bank is going to be cutting interest rates in the second half of 2008 which is obviously going to be put some money in New Zealanders pockets," says ANZ chief economist Cameron Bagrie.

But the Reserve Bank says even if that happens, it won't make an immediate impression on home mortgage rates.

It says the effective cost of mortgage borrowing will continue to rise over the next 12 months and is forecasting house prices to fall 22% before gradually recovering.

And the bank predicts high interest rates together with food and petrol prices will hit household consumption.

Inflation is expected to peak at 4.7% later this year - the highest it has been in 18 years before falling back to within comfortable limits.

"We project annual CPI inflation to peak at 4.7% in the September quarter of this year. Although much of this reflects higher food and energy prices, underlying inflation pressure also remains persistent," he says.

Bollard says there will be little GDP growth over 2008 and only a modest recovery after that due to the weaker household sector.

"On our numbers we don't have a recession but  certainly we could rule out the possibly of a technical recession," he says.

And Bollard says while  government spending and personal tax cuts will provide some stimulous, it will also add to inflationary pressure.

Bollard refused to be drawn on the impact of possible higher tax cuts promised by the National Party.