Interest rates left on hold

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.

Reserve Bank Governor Graeme Wheeler said: “Economic growth has slowed in recent months and has been accompanied by low inflation and rising unemployment. However, over the next two years, growth is expected to accelerate to between 2.5 and 3 percent per annum.

“The global outlook remains soft but appears less threatening than was the case earlier in the year. The risk of severe near-term deterioration in the euro area has decreased and Chinese economic indicators have been more positive recently. However, uncertainty around the US fiscal position is constraining US growth.

“Repairs and construction in Canterbury continue to gather pace, and the housing market is strengthening, particularly in Auckland. Lower funding costs for New Zealand banks, along with increased competition for lending, have seen mortgage interest rates reduce.

“Dampening factors include the Government’s fiscal consolidation and continued cautiousness by households and businesses in their spending decisions. The high New Zealand dollar continues to be a significant headwind, restricting export earnings and encouraging demand for imports.

“The overall outlook is for stronger domestic demand and the elimination of current excess capacity by the end of next year. This is expected to cause inflation to rise gradually towards the 2 percent target midpoint.

“Monetary policy remains focused on keeping future average inflation near the 2 percent target midpoint. The Bank is closely monitoring indicators for any sign of further moderation and is mindful of recent downside surprises to employment and inflation outturns. With the reconstruction-driven pick-up in investment now clearly underway, the Bank will also continue to watch for a greater degree of inflation pressure than is assumed.

“On balance, it remains appropriate for the OCR to be held at 2.5 percent.”

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