9 Dec 2010

Reserve Bank keeps interest rates at 3%

8:32 pm on 9 December 2010

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

The central bank says economic activity has weakened further and it is now expecting more limited interest rate rises over the next two years than it had previously signalled.

"While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing," the bank's statement said.

The bank says economic activity has weakened further, businesses are reluctant to invest, household spending is weak and people are hesitant about buying houses or borrowing more.

And it says the higher New Zealand dollar is hindering an export-led recovery.

Reserve Bank governor Alan Bollard says it would be prudent for the Government to get its books back into surplus faster.

Dr Bollard told Checkpoint the dollar is causing problems for exporters and a government in surplus could save more, reducing pressure on interest rates and the dollar.

Dr Bollard admits low interest rates are not providing the impetus to the economy he had previously expected.

He says the Reserve Bank does not have a date in mind for when the Government should be back in surplus.

On the positive side, Asian demand for dairy and meat products remains robust, though Europe's debt problems and China's efforts to clamp down on inflation could derail stronger global growth.

Dr Bollard says the 2011 Rugby World Cup and the rebuilding of the earthquake-hit region of Canterbury will bolster growth.

Economy stalls

On Wednesday, data released by Statistics New Zealand indicated the economy stagnated in recent months.

Manufacturing sales volumes fell to the lowest level in more than ten years, and the value of building work carried out dropped for the first time in a year.

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%.