14 Jun 2012

Reserve Bank leaves official cash rate unchanged

6:47 pm on 14 June 2012

The Reserve Bank is predicting a later start to increases in the Official Cash Rate after it cut its forecasts for economic growth.

The central bank left the cash rate unchanged at its record low of 2.5% on Thursday morning.

The bank is now forecasting growth of 2% in the year to the end of March 2013, down from the 3.1% it projected in March.

Reserve Bank Governor Alan Bollard says that, in addition to a slowdown in Government spending, will have an effect on the economy.

"And the resulting moderation in export incomes, though that's been partially off-set by the fall in the exchange rate, will weigh on economic activity here. In addition, we note that fiscal consolidation is also likely to constrain demand growth."

Dr Bollard says the Reserve Bank is keeping a close watch on the housing market, but sees no signs of a price bubble yet.

The turmoil in Europe and knock-on effect for New Zealand's trading partner growth has been singled out as the reason for the lower forecasts.

The Reserve Bank has also lowered its projection for the 90-day bill rate, seen as a proxy for where the Official Cash Rate is heading and a key driver of commercial banks floating mortgage rates.

It now has the interest rate on those bills not increasing till the second quarter of 2013.

Goldman Sachs economist Philip Borkin says that indicates the cash rate will now rise from mid-2013, a delay from the Reserve Bank's March projection of an increase at the end of 2012.

TD Securities head of Asia Pacific Research Annette Beacher says the Governor's taken the right approach given there are so many risks on the horizon, particularly in Europe.

She says projecting slightly lower GDP, slightly higher inflation and lower bank bills for longer is the correct path to take given it's not known what lies ahead.

BNZ head of research Stephen Toplis says New Zealand is holding up fairly well, despite the messy situation in Europe.

The bank also cut its forecasts for the exchange rate, picking the Trade Weighted Index of currencies to fall from 70.2 in the current June quarter to 66 in early 2015.

The official cash rate was set at 2.5% on 10 March 2011, when it was lowered from 3.0%.