New Zealand leaves official lending rate unchanged

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This was published 11 years ago

New Zealand leaves official lending rate unchanged

New Zealand Reserve Bank Governor Alan Bollard has kept the official cash rate (OCR) at 2.5 per cent at his final review of monetary policy, saying the weak outlook for the country’s trading partners threatens economic growth.

‘‘Several euro-area economies are in recession and Chinese growth has slowed,’’ Dr Bollard told a briefing in Wellington.

Signs of life in the domestic economy were being offset by the government’s plans for fiscal consolidation and a strong currency that ‘‘continues to undermine export earnings and encourage substitution toward imported goods and services,’’ he said.

Dr Bollard has kept the benchmark interest rate on hold for a record 12 meetings, since he sliced half a percentage point from the OCR in March last year as insurance against the effects of the Canterbury earthquake that levelled the nation’s second-biggest city. The rate is at a record low.

The bank hiked its forecast for the currency on a trade-weighted index (TWI) basis, and doesn’t see it falling below 70 until the June quarter in 2014. It was previously picking it to drop into the high 60s in the September quarter of this year.

The kiwi has waxed and waned with equity market sentiment this calendar year, and has been supported by ‘‘rising interest rate differentials between New Zealand and the five countries that make up the TWI and upward pressure on soft commodity prices,’’ the bank said.

The Reserve Bank is under little pressure to move the rate, with the consumer price index right at the bottom of the central bank’s one per cent-to-three per cent target band.

Dr Bollard said underlying inflation recently dipped below 2 per cent, and ‘‘is expected to settle near the mid-point of the target range of the medium term.’’

The bank sees faster economic growth in the 2013 and 2015 March years at 2.4 per cent and 2.2 per cent, while 2014 expansion will be a touch softer than previously forecast at 2.9 per cent.

‘Population growth, reconstruction in Canterbury and regulator maintenance and repairs are expected to drive a substantial pick-up in construction sector activity over the next few years,’’ the bank said.

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‘‘Fiscal consolidation, which will dampen growth in both public and private consumption expenditure, is expected to offset this pick-up.’’

Dr Bollard steps down when his second five-year term expires on September 25 and will be replaced by former World Bank executive Graeme Wheeler.

AAP

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