Bollard keeps OCR at 3%, but tightening expected

Thursday 28th October 2010

The official cash rate has been kept at 3% due to weak spending and a soft property market, however some tightening is still expected.

“Continued household caution has seen consumer spending and housing market activity remain muted, and many firms have become less optimistic about their future," Reserve Bank governor Alan Bollard said.

Despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remains broadly in line with that assumed at the time of the September Monetary Policy Statement.

Bollard said it was appropriate to keep interest rates at what he has previously called “a very stimulatory” level but tighter monetary policy will probably be "required at some stage".

New Zealand's economic recovery from the worst recession in 18 years took a dent this year as households shunned spending in favour repaying debt, while the property market dropped into the doldrums as incoming migrants tapered off and more kiwis looked across the Tasman for brighter employment prospects.

The central bank will want to see "actual growth and evidence that growth is becoming self-sustaining" before hiking rates again, UBS economist Robin Clements said. "We don't anticipate this to be until March next year" with the OCR reaching 4% by end of 2011, he said.

Last week, Bollard told Parliament's Finance and Expenditure Committee he expects consumer spending to pick-up when confidence returns, the labour market improves, and when producers finish paying off debt and can take advantage of the strong commodity prices they've been enjoying.

Consumer confidence took another step lower this month according to last week's ANZ Roy Morgan survey, with people holding off from buying major appliances, even as the government hiked consumption tax 2.5 percentage points to 15%.

Yesterday's National Bank Business Outlook showed companies were more upbeat this month as export season approaches, though the strong kiwi dollar weighed on their expectations for offshore sales.

Earlier this month, the New Zealand Institute of Economic Research, which puts out the quarterly survey of business opinion, said a string of downbeat data during the September quarter raised the threat of a double-dip recession and raised questions about the sustainability of the recovery. Along with GDP and inflation, the confidence survey is closely followed by the central bank when setting monetary policy.

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