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Reserve Bank keeps cash rate on hold

Thursday October 29, 10:44 AM

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The Reserve Bank left the official cash rate (OCR) unchanged at 2.5 percent but indicated the first rate rise off historic lows could be sooner than previously expected.

Reserve Bank Governor Alan Bollard today said "we expect to keep the OCR at the current level until the second half of 2010".

That compares with his message since late-April, when the OCR was cut to its current level, that "we expect to keep the OCR at or below the current level through until the latter part of 2010".

Today's statement removed any suggestion the OCR could go lower, as well as indicating the first rate rise could be earlier in 2010 than previously indicated by the central bank.

But Dr Bollard appeared to be countering market pricing of a better than even prospect of a 25-basis point rise in January.

"In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus," he said.

The New Zealand dollar tumbled after the release of Dr Bollard's statement, from around US72.80c at 9am to about US72c within 45 minutes.

In the statement, Dr Bollard also made clear his unease at the form the country's climb out of recession was taking.

"The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery, and reinforces a bias towards domestic expenditure," he said.

"The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand."

Dr Bollard's move to indicate he was bringing forward the likely timing of the first OCR rise was widely expected by economists, some of whom are even predicting the first hike will be as early as January.

But despite the expectations of some economists, Dr Bollard appeared to be untroubled by the higher than expected 1.3 percent rise in the consumers price index for the three months to September.

"Annual CPI inflation is expected to continue to track comfortably within the target range over the medium term," Dr Bollard said.

At the same time he pointed to "welcome signs" economic activity was growing again.

"Activity in New Zealand's trading partners continued to rebound during the September quarter and financial market sentiment has improved further," he said.

"However, there remain significant vulnerabilities and challenges to be worked through in many economies. This process could weigh on global growth going forward."

In this country, the housing market had reversed some of the decline in prices experienced in the past couple of years and a "very gradual" rise in household spending appeared to be taking place, Dr Bollard said.

Government spending was supporting activity, but business spending remained weak and credit growth was "very subdued".

"The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support to the economy. We think such support remains appropriate.

"Further ahead, removing some of the current fiscal stimulus is likely to reduce the work that monetary policy will otherwise have to do."

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