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OCR held as Canterbury quake takes toll

By Paul McBeth

Thursday 16th September 2010

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Reserve Bank Governor Alan Bollard held the official cash rate at 3%, as expected, and said the track for future rate hikes would be "more moderate" than previous forecasts, as the Christchurch earthquake disrupts an already slowing recovery.

"The earthquake that struck Canterbury on 4th September has significantly disrupted economic activity and is likely to do so for some time yet," Bollard said in a statement in Wellington today.

"The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement."

Bollard reined in the expected track of rate hikes to a slower pace than in his March and June policy statements, shaving more than a percentage point from the 90 day bank bill forecast in the second half of 2011 onwards.

Manufacturing and business confidence have been shrinking in recent months, and tepid housing and consumer spending data have kept economists downbeat about the prospects for New Zealand's economy. Retail sales unexpectedly shrank in July, while home sales have fallen to the same level in the depths of the global financial crisis.

These weak indicators were compounded by the collapse of the country's second-biggest finance company, triggering a $1.775 billion payment to creditors under the government's retail deposit guarantee scheme, and a 7.1 magnitude earthquake in Christchurch that caused an estimated $4 billion worth of damage.

Today's pause, though expected, forces Bollard to take the risk of between keeping stimulatory monetary conditions as inflation begins to accelerate. The impact of higher GST, ACC charges, tobacco excise and emissions trading charges is forecast to push annual inflation over 5% in the first quarter of 2011.

"The challenge for the RBNZ remains how to continue moving policy interest rates towards less stimulatory settings without derailing the economic recovery," economists at ANZ said before the MPS was released.

Just one of 19 analysts surveyed by Reuters expected Bollard to hike, with the rest predicting he'd hold rates.

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