28 Oct 2010

Reserve Bank keeps benchmark interest rate on hold

4:55 pm on 28 October 2010

The Reserve Bank has held the Official Cash Rate at 3%, in its latest review on Thursday, because of the continuing weak economy.

The Reserve Bank surprised many when it slashed its forecasts for the economy in September, and on Thursday governor Allan Bollard said that while the economy had weakened in some areas since then, the bank had not overall changed its view.

In his statement Dr Bollard said recent data has turned out weaker than projected.

"Continued household caution has seen consumer spending and housing market activity remain muted, and many firms have become less optimistic about their future prospects.

"However, continued high export prices, along with reconstruction and repairs in Canterbury, will support activity over the coming year.

"Outside New Zealand, recovery in many developed economies are inhibited by high public and private debt, though strong growth continued in China, Australia and emerging Asia.

"Overall, continued GDP growth is expected to gradually absorb current surplus capacity over the next few years.

"Headline inflation is expected to move higher following the recent increase in the rate of GST. The subdued state of domestic demand suggests this inflation spike will have limited impact on medium-term inflation expectations."

Dr Bollard said that while it is appropriate to keep the cash rate on hold at present, it remains likely that further removal of monetary policy support will be required at some stage.

The bank began raising the rate from its year-long level of 2.5% in June this year, moving it to 2.75%, then raising the benchmark rate again in July to its current level of 3%.

Money market interest rates and the stock exchange rose after Thursday's decision.

At midday, the New Zealand dollar was half a cent higher against its American counterpart, trading at 74.77 US cents. Banks' cost of borrowing for two years on the local money market edged up.