29 Oct 2015

Reserve Bank leaves benchmark interest rate unchanged

1:33 pm on 29 October 2015

The Reserve Bank has held the Official Cash Rate at 2.75 percent, but has again indicated further cuts are likely.

Reserve Bank governor Graeme Wheeler.

Reserve Bank Governor Graeme Wheeler Photo: RNZ / Diego Opatowski

The central bank last reduced the key interest rate on 10 September, from 3 percent to 2.75 percent, the third consecutive drop since June, citing a slowing economy and weak inflation.

Reserve Bank Governor Graeme Wheeler said global dairy prices had recovered recently and parts of the economy, such as the services sector and construction, remained robust.

Mr Wheeler was also concerned about low interest rates over-stimulating the Auckland housing market.

However concerns remained about weak growth in China and East Asia weighing on the global economy, and Mr Wheeler warned it was too early to say whether rebounding dairy price gains would be sustained.

The dollar has also risen since September and if that rise was sustained, Mr Wheeler said, lower interest rates would be needed.

Despite expectations inflation would comfortably return to well within the the central bank's 1 percent to 3 percent target band by early next year, Mr Wheeler signalled at least one more rate cut was likely.

Analysts are divided over when that may be or even whether any more reductions will be needed.

After a lull in the first half of the year chief executive of the Employers and Manufacturers Association in Auckland Kim Campbell said the economy had picked up.

"Everyone's saying it's contracting, it's not. We're still growing, I suspect when it's finally looked at in a few month's time there'll be a 3 in front of that growth, and not a 2."

Director of economics and strategy at First NZ Capital Chris Green said another cut could come as early as December, which would take the cost of borrowing back to its record low of 2.5 percent.

"They had an expectation that some further easing was likely at this point, we would look for another 25 basis cut in the December meeting. That's going to be data dependent, but certainly the door is open for another cut."

The Reserve Bank said the obstacles to cutting rates below 2.5 percent were high, but Mr Green said the lack of inflation globally meant it could not be ruled out.

Mr Wheeler said at the moment it was appropriate to wait and see.

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