28 Jul 2011

Reserve Bank signals end to record low interest rate

10:10 pm on 28 July 2011

The Reserve Bank has left the Official Cash Rate (OCR) at 2.5% but signalled the emergency rate cut after the February earthquake will not remain in place much longer.

The central bank announced its latest decision on the benchmark interest rate on Thursday.

Financial markets have interpreted the comments by Reserve Bank Governor Alan Bollard as a sign the rate will rise by 0.5 percentage points to 3% at the bank's next review in September.

Dr Bollard noted concerns that the export-led recovery faces risks, particularly from a default by the United States government on its debts.

He pushed aside those concerns for now, saying the economy has been growing more quickly than expected and stating that he now sees little need for the emergency cut to the Official Cash Rate made on 10 March to stay in place much longer.

But Dr Bollard says once that cut is reversed, further rate rises could be limited by the high value of the New Zealand dollar.

BNZ currency strategist Mike Burrowes says investors chose to concentrate on the possibility of a 0.5 percentage point rise in September, rather than the signal of smaller hikes later on, pushing the currency higher.

Dollar remains strong

The New Zealand dollar maintained its strong form against all currencies on Thursday after the latest review of the official cash rate.

The Kiwi was trading slightly under US87 cents against an American dollar strengthening on Thursday morning as investors pulled money back from the United States in anticipation of a credit rating downgrade.

The dollar gained nearly half a cent against the Greenback and was stronger against the Euro, Yen and Australian currencies.

At 5pm on Thursday, the Kiwi was buying US87.22 cents after a mid-afternoon wobble took it under US87 cents.