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Bollard leaves cash rate unchanged


Thursday 28th July 2011

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Reserve Bank Governor Alan Bollard has left the official cash rate (OCR) unchanged at a record low 2.5 percent, but indicated a rise may not be far away.

Provided current global financial risks receded and the economy continued to recover, the Reserve Bank saw little need for the insurance cut made in March -- from 3 percent to the present 2.5 percent -- "to remain in place much longer", Bollard said.

But he added that the "very high" value of the New Zealand dollar was acting as a drag on the economy.

"If this persists, it is likely to reduce the need for further OCR increases in the short term," Bollard said.

When the Reserve Bank lowered the OCR in March he had said it was acting pre-emptively to lessen the economic impact of the deadly February earthquake in Christchurch and guard against the risk of that impact becoming especially severe.

At the time he had acknowledged it was difficult to know how large or long-lasting the impacts of the quake would be.

Today Bollard said the economy had grown more strongly than expected, and it appeared a recovery was getting back on track, supported by strong terms of trade.

At the same time, he cautioned that fragility in global financial markets, including uncertainty around the United States government's debt ceiling, continued to highlight downside risk to activity in this country's trading partners.

Bollard called on wage and price setters to focus on underlying inflation, which he said was estimated to be below 2.5 percent.

While annual headline consumer price index inflation continued to be above the Reserve Bank's target band of 1-3 percent a year, much of that spike in inflation would be temporary as it had been driven by the rise in GST last October, Bollard said.

The OCR was kept at 2.5 percent between April 2009 and June 2010 as the country grappled with the impact of the global financial crisis. It was raised to 2.75 percent in June 2010 and to 3 percent a month later.

But that had been followed by weaker than expected growth through the second half of 2010, as households remained cautious and farmers used the proceeds from high commodity prices to repay debt. There were some signs of recovery early this year before the uncertainty brought by the quake.

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