8 Dec 2011

Bollard leaves cash rate unchanged

10:49 pm on 8 December 2011

New Zealand's Reserve Bank governor says the crisis in Europe would have to worsen dramatically before he will cut the Official Cash Rate.

Alan Bollard on Thursday left the benchmark interest rate on hold at its record low of 2.5%, set on 10 March this year. It was previously 3%, which was set on 29 July 2010.


Dr Bollard said the debt crisis in Europe is slowing the recovery in New Zealand, but the cash rate is staying where it is for now.

He said domestic economic activity continues to improve modestly, with commodity prices remaining high and the softening New Zealand dollar helping the export sector.

But Dr Bollard again warned that the eurozone crisis could spill over into economies in Asia-Pacific and put pressure on funding costs for banks. Global conditions have deteriorated and there is a risk they could weaken further.

The rebuilding of earthquake-hit Christchurch was also expected to significantly boost demand when it begins next year.

The Reserve Bank expects the economy to grow by 2% in the year to the end of March 2012, less than the 2.8% forecast three months ago.

''Given the current unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent for now to keep the OCR on hold at 2.5%,'' Dr Bollard said on Thursday.

Earlier this week, the Treasury downgraded its growth forecasts.

The Reserve Bank of Australia on Tuesday reduced interest rates for the second consecutive month to 4.25% in response to the financial turmoil overseas.

Cut to cash rate not much help - exporter

An exporter says a cut to the Official Cash Rate would not have done much to help his business.

Economists say the Reserve Bank in its statements on Thursday has set a very high hurdle for a cut in the benchmark interest rate, even if the situation in Europe worsens.

But Peter McKee, managing director of Wellington's Windsor Engineering, says a cut is not going to deal with the major problem facing most exporters.

"At the moment, manufacturing statistics aren't great. I think that's subject to straight-out demand and I think there's a lot of things driving that (ie) international concerns.

"A cut in the cash rate might have helped the dollar, but I'm not sure it would have suddenly created a change in demand."

ANZ chief economist Cameron Bagrie says the situation remains volatile.

"The Reserve Bank is flagging, but they might be lifting interest rates around the third quarter of next year, and then the Official Cash Rate might get to sort of 4%.

"But these are pretty uncertain times at the moment, so I guess if you have a look at those projections you would treat them with a grain of salt".