The Reserve Bank has left the Official Cash Rate (OCR) unchanged at 2.5 percent but indicated it may cut again.
It’s the first time in nine reviews of official interest rates dating back to June last year that the central bank hasn’t cut the OCR.
Reserve Bank governor Alan Bollard said today although the economic outlook remained weak both in New Zealand and overseas, there were signs international economic activity was stabilising. Furthermore, international financial conditions were improving.
Domestically the economy, mired in recession since the start of 2008, was expected to start growing again toward the end of this year although the recovery was likely to be slow and fragile.
“We therefore consider it appropriate to continue to provide substantial monetary policy stimulus to the economy,” Bollard said.
“The OCR could still move modestly lower over the coming quarters. As we said at the time of the April OCR decision, we expect to keep the OCR at or below the current level through until the latter part of 2010.”
The OCR was slashed from 8.25 percent to 2.5 percent between July 2008 and April this year as the Reserve Bank tried to breathe life into the domestic economy against a backdrop of the worst global economic crisis since World War II.
“We have cut the OCR by a large amount over the year,” Bollard said.
“We expect the effects to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing.”
However, he had another crack at the retail banks, also under pressure from MPs for not passing on OCR cuts to mortgage holders, saying although rising longer-term interest rates overseas where banks source much of their funding were placing pressure on longer-term lending rates here, there remained room for further reductions in shorter-term lending rates.
Bollard also said that although there remained material downside risks to economic activity and inflation, for the first time in some months the Reserve Bank could identify some “clear upside opportunities” for activity.
One example was a potential rebound in household spending and residential investment due to rising immigration and a pick-up in the housing market.
“Ultimately, however, we do not think such a rebound in spending would prove sustainable given the soft outlook for employment, wages and farm incomes and high levels of household debt,” said Bollard.
Statistics New Zealand figures out last month showed unemployment rose to 5 percent, or 115,000 in March, its highest level in six years.
However,on Monday Quotable Value said its national residential property indices for May, recorded an 8.1 percent decline in values over the past year. That was an improvement on the 9.2 percent decline reported for the year to April, and the second month in a row where the year-on-year change improved, QV said.
The improvement was due to continued stabilisation of property values in recent months and contrasted significantly to a market that was declining sharply 12 months ago, QV added.
Bollard said, however, the risks to the economy remained weighted on the downside. The negatives included the recent rise in the kiwi dollar which created an “unhelpful tension.” A strong dollar at a time of weak global growth risked delaying or even reversing a projected rise in exports.
Annual consumer price index inflation was likely to fall temporarily below the central bank’s 1 percent to 3 percent target range later this year. However, Bollard expected inflation to return to the target range by early next year.
It was likely to be “some time” before an economic recovery became self-sustaining and monetary policy support could be withdrawn, Bollard added.
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