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No surprises as Bollard leaves cash rate well alone

No surprises as Bollard leaves cash rate well alone
No surprises there: Reserve Bank Governor Alan Bollard has opted to leave the official cash rate unchanged, saying the economy has performed "relatively well" amidst global turmoil.

No surprises there: Reserve Bank Governor Alan Bollard has opted to leave the official cash rate unchanged, saying the economy has performed "relatively well" amidst global turmoil.

Market reaction following his statement was muted, with the dollar easing slightly, falling below 82 cents US in the half hour afterwards.

“The New Zealand economy has performed relatively well while headline inflation has increased somewhat," he said.

“If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase. For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 percent."

However, the outlook for New Zealand’s trading partners has deteriorated markedly, he said.

"There is now a real risk that global economic activity slows sharply ... Sovereign debt concerns in Europe and the weakened global outlook have caused international bank funding markets to tighten. If conditions do not improve, New Zealand bank funding costs will increase."

ASB economist Christina Leung said the RBNZ was clearly very concerned about increased global economic and financial risks, having revised down its medium‐term growth outlook.

"A December OCR increase is possible if Europe cleans up its backyard soon, though implies the crisis soon comes to a head (very possible) and that Europe puts in place a lasting solution (less probable on past performance)."

A 50 basis point increase in March was more likely, however, with the RBNZ appearing comfortable with the status quo.

According to Bollard, the high dollar was having a dampening influence on some parts of the tradables sector as well as on inflation on imported products.

“Largely because the New Zealand economy has been doing better than many others, the New Zealand dollar has appreciated since the June statement."

He praised high commodity prices and the Canterbury rebuild as contributors to the buoyant overall picture.

“Domestic economic activity has surprised on the upside and capacity usage appears to have increased. Continued high export commodity prices and, in time, reconstruction in Canterbury are expected to provide impetus to demand over the projection horizon."

But inflation continued to run above the bank's 1-3 percent target band.

Bollard said much of that spike was driven by last year's GST rate hike and would be temporary.

"Wage and price setters should focus on underlying inflation, which, while rising, is currently estimated to be near 2 percent."

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