28 Jul 2012

Interest rates predicted to hold until next year

6:30 pm on 28 July 2012

Economists say interest rates are likely to stay as they are until well into next year but warn they could drop further if the financial turmoil in Europe worsens.

On Thursday, the Reserve Bank kept the rate at its record low 2.5% for the 11th consecutive time, largely because of Europe's woes and subdued local conditions.

Deutsche Bank chief economist Darren Gibbs says he expects it to stay that way for the next 12 months - assuming Europe continues to muddle through, the economy slowly picks up and inflation is benign.

But the Reserve Bank says there remains a limited risk that conditions in Europe will deteriorate very significantly.

Mr Gibbs says if that happens, interest rates will fall further.

He says, fortunately, New Zealand has some wriggle room.

Mr Gibbs says most of the developed world has interest rates at or near zero, so New Zealand has the capacity to take them lower. If things were to deteriorate further offshore, he adds, there would likely be downward pressure on the currency and that would help a bit as well.

BNZ economist Doug Steel says Europe's not the only place in the spotlight: there is a lot going on in the Middle East, a sharp slowdown in Asia and the United States isn't out of the woods yet.

"So lots of moving parts to keep hold of," he says, "but I guess the one that's most likely to go haywire, we think, is still the European debt crisis."