Bollard holds OCR

Thursday 10th September 2009

Reserve Bank Governor Alan Bollard held the official cash rate at 2.50% today, as expected, and reiterated his view that the rates will stay low until the end of next year.

This is in contrast to the markets which have been suggesting rate rises early next year.

In the statement he said: "As we have said previously, the forecast recovery in economic activity is based on monetary policy continuing to provide substantial support to the economy. We expect such support will be needed for some time. “As a result, we continue to expect to keep the OCR at or below the current level through until the latter part of 2010."

Bollard said the kiwi dollar's strength is a threat to the recovery.

"If the exchange rate were to continue its appreciation and/or the recovery in house prices were to undermine the improvement in household saving then the sustainability of the present recovery will be bought into questions," Bollard said in Wellington today. He retained the bank's easing bias, saying the OCR would have to remain at or below current levels through until the second half of 2010.

The economy will climb out of recession in the third quarter, the Treasury said this week, ending a six-quarter contraction that's slashed company earnings, eroded government tax revenue and driven up unemployment.

Still, the kiwi dollar's 41% surge from its lows in March is hampering the prospects for an export-led recovery and for the rebalancing in the economy away from debt-funded consumer spending and housing investment.

"While the volume of indicators pointing to a significant improvement in

New Zealand's economy over the next 12 months is mounting, there remain a number of meaningful risks," said Mark Walton, economist at Bank of New Zealand, before the report. "Not least (are) a troublesome NZD, an unbalanced growth profile and a still-uncertain global prognosis."

The kiwi dollar dropped to 69.36 US cents from 69.56 immediately before the statement.

In a report last week, Bank of New Zealand chief economist Tony Alexander said the evidence of a turnaround in New Zealand's economy can't be ignored any longer. Still, with restraints on the dairy, tourism and commercial property sectors, "the upturn will not be a boom."

Yesterday, government data showed New Zealanders lifted purchases on credit and debit cards for a second month in August, stoking optimism that consumers are becoming more willing to spend amid signs the recession may be drawing to an end.

Last month, business confidence climbed to a net 34% of firms expecting conditions to improve in the coming year according to the National Bank Business Outlook, the third straight month where optimists outnumbered pessimists, while the latest Roy Morgan poll showed consumer confidence rose to a 17-month high.

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