13 Sep 2012

Official cash rate held at 2.5%

7:05 pm on 13 September 2012

Outgoing Reserve Bank Governor Allan Bollard made no change on Thursday to the Official Cash Rate, which remains at 2.5%.

In a statement on Thursday, Dr Bollard said:

"New Zealand's trading partner outlook remains weak. Several euro-area economies are in recession and Chinese growth has slowed. The risk of significant deterioration in the euro area persists.

"Domestically, the Bank continues to expect economic activity to grow modestly over the next few years.

''Housing market activity continues to increase as forecast, and repairs and reconstruction in Canterbury are expected to further boost the construction sector.

''Offsetting this, fiscal consolidation is constraining demand growth, and the high New Zealand dollar continues to undermine export earnings and encourage substitution toward imported goods and services.

"Underlying annual inflation, which recently moved below 2%, is expected to settle near the mid-point of the target range over the medium term. It remains appropriate for the OCR to be held at 2.5%."

The previous rate of 3% was lowered to 2.5% on 10 March 2011.

Dr Bollard said he's leaving the job with the economy in a reassuringly boring state.

He acknowledged everyone wants to see the economy growing more strongly. But given the intense volatility of the global economy, he said New Zealand is not doing so badly.

However, he regretted not intervening to slow down the country's housing bubble in the mid-2000s.

Dr Bollard is to be executive director of the APEC Secretariat in Singapore. His replacement is Graeme Wheeler, previously with the World Bank.

OCR tipped to remain low

ANZ Bank chief economist Cameron Bagrie said on Wednesday that high unemployment and sluggish economic growth are likely to keep interest rates low for some time.

While commodity prices and the property market are up, Mr Bagrie said the job market is depressed, household savings are practically zero and the global economy is still wobbly.

Mr Bagrie said the best strategy in this environment is a 'wait and see' approach. He does not expect an increase in the OCR until 2014.

Mr Bagrie said Dr Bollard would also not want to tie the new Governor's hands by changing strategy at this time.