9 Mar 2012

Reserve Bank governor issues dollar warning

7:38 am on 9 March 2012

Reserve Bank governor Alan Bollard has suggested the Official Cash Rate could be cut if the strength of the dollar continues to undermine some parts of the economy.

The central bank left its benchmark Official Cash Rate (OCR) on hold at a record low of 2.5% on Thursday morning.

Dr Bollard said the economy was showing continued signs of recovery with household spending picking up in recent months and building activity improving.

High commodity prices are also helping the domestic economy, and the governor expects the recovery to strengthen further as the rebuilding of Canterbury gets underway later this year

However, he said the New Zealand dollar is now higher than justified by the country's economic performance.

"While helping to contain inflation in New Zealand, that high value of the New Zealand dollar is, we believe, detrimental to the tradeable sector here and is undermining some aspects of New Zealand's GDP growth."

He said the dollar's strength has not helped the export sector.

Dr Bollard says the Reserve Bank expects to raise the OCR from late this year - but could cut it if the dollar moves even higher.

The dollar was buying 81.88 US cents at 5pm Thursday.

Dr Bollard said actions from a number of central banks to boost global confidence are encouraging, and have reduced the risk of the European sovereign debt crisis deteriorating further.

Risks remain, however, and financial market sentiment remains fragile. The global banks' actions have also had the effect of boosting the New Zealand dollar.

The governor said inflation has settled in the middle of the Reserve Bank's 1-3% target band and inflation expectations have fallen.

The central bank has pared back its growth forecast for this year, and now expects GDP to rise 1.8% in 2012 compared with the 2% it forecast in December.

However, it has slightly lifted its growth projections for the next two years, and is now predicting growth of 3.1% in 2013 and 3.7% in 2014. This is an upward revision from forecasts of 2.9% and 3.2% made three months ago.

The Official Cash Rate has been at 2.5% since 10 March 2011.