The Reserve Bank has kept the Official Cash Rate (OCR) at 2.5%. The rate - which determines commercial bank lending rates - has been at that level since 10 March.
Dr Bollard says domestic activity continues to expand at a modest pace - though business confidence has fallen back somewhat recently - and the Canterbury rebuild will boost demand.
But it's prudent, he says, to keep the cost of borrowing on hold because of the global economic and financial risks.
"There is a real risk," Dr Bollard says, "that the European sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand's commodity export prices.
''The difficult international market conditions could also result in increased New Zealand bank funding costs over the coming year."
He adds however that if global developments have "only a mild impact on the New Zealand economy", future OCR increases are likely.
Dr Bollard says annual headline CPI inflation continues to be above the bank's 1%-3% target band, with September-quarter data suggesting that, once last year's GST rise and other one-off influences have passed, underlying inflation is settling near 2%.
Caution warranted, says economist
Westpac's chief economist Dominick Stephens says the Reserve Bank is right to stick with its cautious approach to raising interest rates while the European banking crisis poses such a risk.
He says the Reserve Bank's outlook is very similar to what it was last month.
Domestic conditions, he says, may warrant a rise in interest rates but there is a good case for caution in the light of the European situation.
