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Reserve Bank holds OCR at 2.5 per cent

JAMES WEIR
Last updated 10:48 08/12/2011

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Official interest rates are expected to remain on hold until late next year according to some economists, after the Reserve Bank left rates unchanged at 2.5 per cent this morning.

ASB Bank economists said it expected official rates to stay on hold until December next year, even though the Reserve Bank's forecasts implied the first move in the September quarter next year.

Westpac said it expected the first rate rise in September.

The Reserve Bank has dropped any mention of rates rising in the future. ANZ economists said that was appropriate given it was hard to see the global situation improving any time soon.

But the hurdle to actually cut rates was "very high", ANZ said, and would depend on a much deeper global recession than assumed in the Reserve Bank's central scenario.

The bottom line was that the Reserve Bank would remain on hold "for a long time", ANZ said.

Deutsche Bank said a rate rise would come by the middle of 2012 "at the earliest".

If the central bank moved at any of its next few meetings, it would be to cut rates rather than increase them Deutsche Bank said, though the hurdle for a cut was "quite high".

The Reserve Bank held official interest rates at 2.5 per cent, as the global economy worsens in the face of the European debt crisis.

The kiwi dollar gained a little ground after the announcement, trading at US77.99c about 10.45am from US77.75c just before 9am.

"There is a risk that conditions weaken further," Reserve Bank Governor Alan Bollard warned earlier this morning.

Given the current "unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the official cash rate on hold at 2.5 per cent", Bollard said this morning.

Monetary policy was expected to remain "supportive for some time" with the Reserve Bank's expected track for ninety day interest rates now lower for longer than expected in the September statement.

There were "continued difficulties" related to country and bank debt in a growing number of European economies, and financial markets were highly volatile.

International activity had softened including the Asia-Pacific region. 

The global slowdown was hitting New Zealand, but the impact so far was limited Bollard said.

While the central projection was for a "moderate downturn in global activity" risks around that outlook had intensified significantly, the Reserve Bank said in its December Monetary Policy Statement.

That was mainly because of the concerns about the strength of Europe, where activity had worsened faster than expected in recent months.

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A sharper than expected slowdown in Europe would "materially reduce activity in other regions including Asia and Australia".

If things turned out worse than now expected, global trade and commodity prices would fall and global activity could remain weak for an extended period, the bank said.

Growth in New Zealand would also be weaker than assumed in the central projection of the bank, which suggests growth picking up to about 3 per cent in the year to March 2013.

If that happened, monetary conditions would need to remain supportive for an extended period, even as the Christchurch rebuild boosted demand.

Meanwhile, the Reserve Bank said that business confidence had fallen this year and investment spending was likely to remain weak for some time.

Tight international financial markets meant that it would cost more for New Zealand banks to borrow overseas to some degree in the coming year.

"There remains a high degree of uncertainty around the global outlook and there is a risk that conditions weaken further," Bollard said.

In New Zealand, domestic activity was still expanding, but modestly.

Export commodity prices remained high, though off recent peaks.

The fall in the Kiwi dollar had provided some support for the export sector.

"Over time repairs and reconstruction in Canterbury will also provide a significant boost to demand for an extended period," he said.

The rebuild was expected to cost about $20 billion over a number of years, but widespread work would only start in earnest in the second half of next year, peaking in early 2014. The outlook for rebuilding in Christchurch also remained highly uncertain, but eventually it would provide a boost like the mid 2000s building boom.

However, the Reserve Bank's projections for economic growth are modest, with quarterly growth of 0.6 per cent in the last quarter of this year, rising to 0.8 per cent by the end of 2012.

Annual GDP growth was projected to be 2 per cent in the year to March 2012, rising to about 3 per cent in the following March year, despite the expected pick up from rebuilding in Christchurch.

Unemployment is projected to trend down slowly from 6.6 per cent now to 5.6 per cent by March 2013.

- BusinessDay.co.nz

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