27 Jan 2011

No change in official interest rate

6:02 pm on 27 January 2011

The Reserve Bank has left the Official Cash Rate unchanged at 3%.

A statement accompanying the central bank's decision on Thursday morning says the economy is performing in line with projections made in December.

But in a change from its December statement, the bank noted tentative signs of stabilisation in the housing market.

Governor Alan Bollard signalled in December that the subdued economic recovery was likely to mean fewer rate rises in the next two years.

The OCR was previously raised on 29 July from 2.75%. It was at 2.5% from 30 April 2009 to 10 June 2010.

After the announcement, the New Zealand dollar rose 1 cent and at 5.20pm on Thursday was trading at US77.24 cents.

ASB chief economist Nick Tuffley says the Reserve Bank continues to signal it wants to be certain the recovery is firmly under way, before it starts lifting interest rates.

Mr Tuffley says it may be the middle of the year before real evidence of a recovery is apparent and expects the bank to leave the official cash rate on hold until September.

Bank statement

In a statement on Thursday morning, Dr Bollard said:

"The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement.

"Domestic economic activity was weaker than forecast through the second half of 2010. September quarter GDP declined unexpectedly, and retail spending appears to have fallen in the December quarter.

"Forward indicators of activity have firmed somewhat. Trading partner activity continues to expand and New Zealand's export commodity prices have increased further.

"Within New Zealand, business confidence, across a range of industries, has picked up and imports of capital equipment have grown. Furthermore, there are tentative signs that housing market activity has stabilised, after having trended lower for some months.

"The recent increase in the rate of GST has caused headline CPI inflation to spike higher as expected, but underlying inflation remains comfortably inside the target band.

"As noted previously, while interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing."