16 Sep 2010

Reserve Bank holds interest rate

7:36 pm on 16 September 2010

The Reserve Bank is holding the Official Cash Rate at 3%.

The Canterbury earthquake on 4 September and the lacklustre national economy are expected to help keep the cash rate at 3% until 2011.

The central bank is required to look past temporary price increases from a natural disaster and Reserve Bank governor Alan Bollard did that when he kept the Official Cash Rate unchanged after increases in June and July.

Dr Bollard said the quake could increase building costs and inflation, but only on a temporary basis.

He said the New Zealand economy remains weak on a number of fronts and the outlook for growth in western economies has worsened in recent months.

Business balance sheets appear to be in good shape but borrowing confidence needs to return before any real economic growth is seen, he said.

Growth is being hampered by sober markets overseas, including a slow US labour market and cautious homeowners in New Zealand.

Mr Bollard says businesses are reluctant to get bank loans at present, choosing instead to make investments using savings.

Exports to Asian countries, particularly China, would provide some support for the New Zealand economy, help use up spare capacity and force up prices.

Dr Bollard painted a downbeat picture of the domestic economy. As a consequence, he said the Reserve Bank will raise the cash rate only gradually.

The OCR was previously at 2.5% for the period 30 April 2009 to 29 April 2010. It was raised to 2.75% on 10 June and 3% on 29 July this year.

Markets taken by surprise

Financial markets have been taken by surprise by the Reserve Bank's downbeat assessment of the economy.

The New Zealand dollar lost half a cent against its American counterpart and interest rates on local money markets fell following the Reserve Bank's decision.

Economists had speculated prices of building materials would rise in the aftermath of the Canterbury earthquake, feeding inflation.

But Dr Bollard downplayed the quake's effect on prices, partly because of the weak state of the economy.

Economists say the central bank's forecasts suggest the cash rate will remain on hold until March next year.