10 Sep 2009

Reserve Bank holds interest rate

9:57 am on 10 September 2009

The Reserve Bank has held the Official Cash Rate at 2.5%. The decision was expected.

Governor Alan Bollard says there has been more evidence of an end to weakness in the economy since the Bank's last review six weeks ago.

The Reserve Bank expects the economy to be at its weakest in the current quarter and resume growth later this year.

But it warns that if either the dollar stays high or a surge in the housing market undermines people's efforts to save, then a longer term recovery could be threatened.

Dr Bollard pledged in July to keep the cash rate at or below 2.5% until late next year.

Since then, the dollar has risen to its highest in 13 months against the US dollar, but dairy export prices are up by 50%.

The OCR was lowered to 2.5% on 30 April. It has been reduced in a series of steps since being cut from 8.25% to 8% on 24 July, 2008.

Bank statement

In a statement issued on Thursday, Governor Bollard said:

"There is more evidence that the decline in economic activity is coming to an end, and that a patchy recovery is underway.

"This is partly due to recovery in our trading partner economies in the June quarter and these look likely to continue expanding in the short term.

"Domestically, retail spending appears to have stopped falling, following a rise in net immigration and a pick-up in the housing market over recent months.

"However, the medium-term growth outlook remains weak. We expect household spending to grow only modestly given weak income growth and a reduced appetite to take on debt.

"Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar; this limits the scope for employment and investment to rebound quickly.

"For growth to be sustained in the medium term there is a need for improved competitiveness in the export sector and a continued recovery of household savings.

"This rebalancing is required to stabilise New Zealand's external payments position.

"If the exchange rate were to continue its recent appreciation and/or the recovery in house prices were to undermine the improvement in household savings, then the sustainability of the present recovery will be brought into question.

"Annual CPI inflation is currently well within the target band and is expected to track comfortably within the band over the medium term.

"As we have said previously, the forecast recovery in economic activity is based on monetary policy continuing to provide substantial support to the economy.

"We expect such support will be needed for some time. As a result, we continue to expect to keep the OCR at or below the current level through until the latter part of 2010."