27 Apr 2012

Reserve Bank keeps interest rates on hold

6:34 am on 27 April 2012

The Reserve Bank has left the Official Cash Rate unchanged at 2.5%, its record low level.

Announcing its latest decision on Thursday, the bank noted the local economy is showing signs of recovery, inflation remains in check but the outlook for the world economy remains uncertain.

However, Reserve Bank Governor Alan Bollard opened the door for a rate cut, if the New Zealand dollar stays strong.

Dr Bollard said it was appropriate to keep the rate at its current level, given the fragile international outlook.

However, he warned rates may stay on hold for longer - or even be cut - if the New Zealand dollar stays at its current high level.

"Should the exchange rate remain strong without anything else changing, the Bank would need to reassess the outlook for monetary policy settings," his statement said.

UBS senior economist Robin Clements said Dr Bollard's statement will not have much influence on the high dollar.

"These sorts of things usually don't work that well unless they're pretty decisive and clear," he said.

"I think the Reserve Bank was just trying to inject a bit of uncertainty because the other issue is that ... the other comments made were about how there are signs of recovery in the economy, so it's difficult to have your cake and it too."

Dr Bollard said the New Zealand dollar had stayed elevated, despite recent falls in commodity prices.

He said housing market activity continued to increase and a recovery in building activity appeared to be underway as forecast.

"That recovery will strengthen as repairs and reconstruction in Canterbury pick up later in the year."

The New Zealand dollar jumped nearly half a cent against its American counterpart immediately after the decision was released but slipped back again by late afternoon when it was trading at US81 cents.

Westpac currency strategist Imre Speizer says the initial surge suggests some investors may have anticipated even tougher talk from the central bank.

Mr Speizer says upbeat growth forecasts from the US Federal Reserve also helped keep the New Zealand dollar in positive territory on Thursday.