15 Sep 2011

Reserve Bank leaves interest rates on hold

4:21 pm on 15 September 2011

The Reserve Bank has left the Official Cash Rate (OCR) unchanged at 2.5% as the risk of a sharp slow-down in the global economy overshadows a robust domestic recovery.

The central bank announced its latest decision on the benchmark interest rate on Thursday.

Governor Alan Bollard said while the bank was surprised by the strength of the recovery in the New Zealand economy in recent months, turmoil on world financial markets had increased the chances of a sharp slow-down in global economic activity.

Deteriorating market sentiment could flow through to New Zealand banks' funding costs, although he said there was little sign of that happening yet.

Dr Bollard said that if recent global developments had only a mild impact on the New Zealand economy, it was likely the OCR would need to increase.

He said the high level of the New Zealand dollar was having a dampening influence on some parts of the tradable sector and on imported inflation.

In his statement, Dr Bollard said annual headline CPI inflation continued to be above the bank's 1 - 3% target band, but much of the current spike had been driven by last year's increase in the rate of GST and would therefore be temporary.

Underlying inflation was rising but was estimated to be nearer 2%. Dr Bollard urged wage and price setters to focus on the underlying inflation figure.

UBS senior economist Robin Clements says rates would most definitely be going up if it were not for the global uncertainty.

The New Zealand dollar slipped half a cent against its US counterpart after the announcement and shortly after midday was buying US81.81 cents.

The cash rate - which dictates mortgage and deposit interest rates - has been at a record low 2.5% since March. Financial markets had widely expected no change would be made on Thursday.