RBNZ holds interest rate at 2.5pc

FINAL CALL: After 10 years as Reserve Bank governor, Alan Bollard steps down from the job later this month.
FINAL CALL: After 10 years as Reserve Bank governor, Alan Bollard steps down from the job later this month.

The Reserve Bank has left the official cash rate (OCR) at its historic low 2.5 per cent, in governor Alan Bollard's final interest rate decision.

The move is more good news for households with mortgages, with general interest rates heavily influenced by the OCR, although savers face low returns on their investments for even longer.

The New Zealand dollar showed little reaction to the announcement, having recently traded at US81.95 cents, from US81.96c immediately before hand. The currency has gained 5.3 per cent in value so far this year.

RBNZ governor Alan Bollard said the New Zealand economy was expected to grow at only a "modest" pace for several years, the outlook for our overseas trading partners was "weak" and inflation is under control.

Bollard said it "remains appropriate" for the OCR to be held at 2.5 per cent, a move widely expected by economists, with no clear signal that increases were coming.

Previously Bollard has described an OCR of 2.5 per cent as "stimulatory" for economic growth, although the phrase had now been dropped.

Today's OCR decision was accompanied with the quarterly monetary policy statement (MPS) which gives the bank's detailed forecasts for the economy.

This showed that the bank expected the 90-bank bill rate, a short term lending rate which tracks anticipated rises in the OCR, was expected to remain at 2.7 per cent until the final quarter of 2013.

That implies the OCR will remain unchanged until December next year. Three months ago, the MPS forecasts suggested interest rate rises from about June 2013.

The OCR was cut to a record low of 2.5 per cent during the recession of 2008-09 and after two increases in early 2010 was cut back to 2.5 per cent shortly after the Christchurch Earthquake.

Since then economists have progressively pushed back when they think interest rates will increase. ANZ chief economist Cameron Bagrie said last week that it could be early 2014 before interest rates increase, with a 30 per cent chance of a cut at some point over the next 12 months.

Bollard, who steps down from the role after a decade later this month, said New Zealand's economic outlook remained largely the same as three months ago.

"Domestically, the bank continues to expect economic activity to grow modestly over the next few years. Housing market activity continues to increase as forecast, and repairs and reconstruction in Canterbury are expected to further boost the construction sector."

The bank said evidence of the Canterbury rebuild were becoming "more apparent" in official figures than three months ago.

"Offsetting this, fiscal consolidation is constraining demand growth, and the high New Zealand dollar continues to undermine export earnings and encourage substitution toward imported goods and services."

Despite warning about the strength of the Kiwi dollar, the Reserve Bank appears to hold little hope that it will weaken in the near term.

On a trade weighted index (TWI) basis the dollar is set to average 72.5 in the current quarter, the highest in decades, and the Reserve Bank forecasts it will fall by less than 6 per cent by early 2015.

While this is good news for consumers and travellers, because it makes goods bought from overseas cheaper, it hurts exporters, because the costs of goods we produce will be more expensive, lowering income.

The statement said global economic growth was likely to remain low, adding that there was a "small but concerning" chance that global conditions could turn out to be significantly worse than expected.

"Several euro-area economies are in recession and Chinese growth has slowed. The risk of significant deterioration in the euro area persists."

Describing the current rate of inflation - 1 per cent in the June quarter - as "low", Bollard said he expected underlying inflation to settle near the middle of its own 1-3 per cent target range over the medium term.

Today's decision was the twelfth in a row that the OCR has been left unchanged, the longest period of steady interest rates since it was introduced in 1999.