6 Dec 2012

Reserve Bank leaves benchmark rate on hold

6:42 pm on 6 December 2012

The Reserve Bank has left the Official Cash Rate unchanged at a record low of 2.5%.

In the bank's latest interest rate decision on Thursday, Reserve Bank governor Graeme Wheeler said the economy probably slowed in the second half of the year and inflation is set to only gradually pick up towards the midpoint of the central bank's 1% to 3% target range.

The governor said repairs and building in Canterbury continue to gather pace, and the housing market is strengthening, particularly in Auckland.

He said the bank was monitoring construction cost levels in Canterbury where prices have picked up by 10% over the last year though have not, at this stage, flowed through to general inflation.

The Government's fiscal consolidation, caution by households and businesses in spending and the high New Zealand dollar are dampening factors, Mr Wheeler said in a statement.

Domestic demand was due to rise and current excess capacity was expected to be eliminated by the end of next year.

"This is expected to cause inflation to rise gradually towards the 2% target midpoint," the governor's statement said, and the bank would watch for a greater degree of inflation pressure than is assumed.

Global outlook

Slowing economic growth in recent months has been accompanied by low inflation and rising unemployment, the governor's statement said.

However, the bank expected growth to accelerate to between 2.5% to 3% a year over the next two years.

Mr Wheeler said this is partly because funding costs for banks have declined by around 30 basis points since the beginning of the year and mortgage rates are at their lowest level in 50 years.

"The global outlook remains soft but appears less threatening than was the case earlier in the year.

"The risk of severe near-term deterioration in the euro area has decreased and Chinese economic indicators have been more positive recently. However, uncertainty around the US fiscal position is constraining US growth."

The OCR, which dictates mortgage rates charged by commercial banks, has been at 2.5% since 10 March 2011.

The New Zealand dollar rose nearly half a cent after the decision.