11 Dec 2014

OCR remains unchanged at 3.5 percent

5:53 pm on 11 December 2014

The Reserve Bank has left the official cash rate unchanged at 3.5 percent, and signalled fewer interest rate hikes in the future.

Reserve Bank Governor Graeme Wheeler

Reserve Bank Governor Graeme Wheeler Photo: RNZ / Diego Opatowski

While global demand had eased and dairy prices had fallen sharply, the central bank said New Zealand's economic growth was running at an annual rate of 3.5 percent.

That was due to momentum in consumer spending and construction activity, which the Reserve Bank said was underpinned by historically low interest rates.

Inflation remained subdued at 1 percent, the bottom end of the Reserve Bank's target band, due to weak global inflation, falling oil prices and a high dollar.

Reserve Bank Governor Graeme Wheeler was predicting annual growth would remain about 3 percent over the next couple of years but inflation pressures appeared contained for now.

"Modest inflation pressure suggests that New Zealand's expansion can be sustained for a considerable period with a more gradual increase in interest rates," he said.

ANZ Bank chief economist Cameron Bagrie said the central bank could afford to wait for at least a year before raising rates again.

"Right here and now, we've got the luxury of very low inflation. Inflation is down about 1 percent, so the Reserve Bank has got time on their side - we've still got that Goldilocks-style economy (with) strong growth, low inflation."

As well, rates could fall if the dairy payout was low for another season, Mr Bagrie said.

Council of Trade Unions economist Bill Rosenberg agreed, saying if lower dairy payouts started to bite hard, then the central bank would be forced to respond.

"That could lead to recessions in parts of the economy, and some regions, but certainly it could also have an effect on the economy as a whole," he said.

"If that happens then we are back to looking at more stimulatory measures."

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