OCR unchanged at 2.5pc

Reserve Bank Governor Alan Bollard has left the OCR unchanged

Relevant offers

The Reserve Bank has left the official cash rate unchanged at 2.5 per cent, in line with economists' expectations.

Reserve Bank governor Alan Bollard reiterated earlier statements that he would not increase interest rates until the middle of the year.

 "Global activity continues to recover, helping push New Zealand's export commodity prices higher. Economic growth is most apparent in China, Australia, and emerging Asia. However, sustained growth throughout our trading partners is not assured, with many still facing impaired financial sectors and overall activity still reliant on policy support."

The New Zealand economy had continued to recover.

"Policy stimulus and improving export earnings have seen a pickup in household spending. That said, households remain cautious, with credit growth subdued. Business spending remains weak.

"Annual CPI inflation is currently at the centre of the target band, and is expected to track comfortably within the band over the medium term.

"The economy is being assisted by both monetary and fiscal policy support. As growth becomes self sustaining, fiscal consolidation would help reduce the work that monetary policy might otherwise need to do.

"If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010."

Economists have picked an April start to rate rises, by which time updated data for gross domestic product, business confidence and inflation will be available.

ASB Bank economist Nick Tuffley The Reserve Bank is being "very cautious to not upset the markets with this announcement".

He still expects Dr Bollard to start lifting interest rates in April, but do so less vigorously than previously forecast.

Instead of hiking the official cash rate to 3 per cent, a 25 basis point rise to 2.75 per cent is more likely.

"Some of the urgency for rapid tightening has dissipated with signs that the housing market's rise is ending.  But a key factor behind our view change is that the relationship between the OCR and lending rates is likely to be a lot firmer than we previously assessed.

"The medium-term inflation outlook will appear less "comfortable" over time," Mr Tuffley said.

Mr Tuffley also said the official cash rate may also peak a 5 per cent, down from a previously assumed 5.5 per cent.

"The key point was that events have kept the Reserve Bank comfortable with its assessment that "around the middle of 2010" is the appropriate timing to start unwinding the stimulus.

Dr Bollard has brought back his 'comfortable' assessment on CPI inflation forecast which was not part of the December statement, Mr Tuffley said.

Dr Bollard could be feeling more relaxed about the inflation outlook following the subdued inflation in the last three months of 2009.

"Nonetheless, we are slightly more concerned about non-tradable inflation pressures as our medium-term inflation outlook is now pushing closer toward the top of the band, with upside risks becoming increasingly evident.

"The Reserve Bank continues to make the not-so-subtle suggestion that fiscal policy could help to reduce the work monetary policy needs to do during the upswing."

UBS senior economist Robin Clements says Dr Bollard appears to be holding the line given in the December monetary policy statement, but there "is a firming up on the expectation of a mid-year start" to interest rate rises.

"Moreover, we believe that the RBNZ is being overly cautious on the progress being made on the trading partner and domestic economic fronts," Mr Clements says

- © Fairfax NZ News