30 Jul 2009

Economic outlook still highly uncertain, says Bollard

6:13 pm on 30 July 2009

The New Zealand economy remains weak, says Reserve Bank Governor Alan Bollard, and is unlikely to recover for some time.

Dr Bollard made the remarks on Thursday morning when announcing the bank's decision to leave the Official Cash Rate (OCR) unchanged at 2.5%. At the same time, he did not rule out further cuts in the rate.

On the money markets the Kiwi dollar dropped nearly a cent against the US dollar in the immediate wake of the announcement.

But BNZ economist Stephen Toplis says the economy is in better shape than some and the dollar's fall may be short-lived if investors continue to punt on the currency.

Not benefiting from commodity price rebound

Dr Bollard said the bank still expected to see a patchy recovery get under way towards the end of the year, but the outlook remained highly uncertain.

Such a recovery might be undermined by the high dollar and still-weak farm export prices.

"New Zealand's merchandise exports are heavily weighted to soft commodities," he said. "As a result, New Zealand has not benefited to any significant extent from the rebound that has occurred recently in global hard commodity prices."

The rate of inflation, however, was well within the bank's target band and should "track comfortably within it over the medium term".

Dr Bollard noted that the exchange rate remains above its most recent forecasts, and that if it stays at those levels, the bank would consider cutting the OCR in order to take some pressure off the currency.

Don't leave it to chance - BERL economist

But BERL economist Ganesh Nana says the Reserve Bank shouldn't be leaving this to chance. It should be intervening in currency markets, Mr Nana says, in order to force the dollar down and boost sagging exporter returns.

Westpac economist Imrie Spiezer says that where the currency goes next is more likely to be determined by overseas developments. If the recovery in the world economy stutters, he says, then the dollar could continue on its new downward path.