26 Jul 2012

Muted market response to unchanged cash rate

10:00 pm on 26 July 2012

Local financial markets gave a muted response on Thursday to the Reserve Bank's decision to keep the Official Cash Rate at its record low of 2.5% for the 11th consecutive review.

The dollar was slightly firmer, rising a tenth of a cent against its American counterpart after the decision and holding the gain through the afternoon. Interest rates on local money markets moved a few basis points higher.

An interest-rate specialist at Harbour Asset Management, Christian Hawkesby, says rates have moved lower in the past fortnight, and could fall again if the world economy worsens.

The Reserve Bank says it is watching the economies of Europe closely and believes the situation there could deteriorate quickly.

The bank says its projections for the economy remain largely unchanged from the last review, in June. It says the outlook for New Zealand's trading partners remains poor, although the local economy is picking up as activity in the housing market recovers further.

Governor expects modest growth in activity

Governor Alan Bollard says he expects activity to grow modestly over the next few years, assisted by the rebuilding of Christchurch.

He says that will be tempered by slowing government spending and a high New Zealand dollar, which will constrain exporter returns.

The cash rate, which influences bank mortgage rates, has been set at its record low since March last year.

Most economists expect the next move in the rate will be up, but that won't happen until next year at the earliest.

But Deutsche Bank chief economist Darren Gibbs is predicting it could fall further if conditions in Europe worsen.

At the time of its June review the bank said the rate was on track to rise from the middle of 2013.

It also says the outlook for inflation remains within its target range of 1-3%.