Bollard holds OCR at 2.5%, forecasts higher dollar for longer

The Reserve Bank is waiting to see how global economic turmoil affects New Zealand before it raises interest rates again.

Governor Alan Bollard left the official cash rate at 2.5% this morning - a non-move universally anticipated by economists.

It is also clear from the accompanying monetary policy statement that although the New Zealand economy is doing better than expected, the high New Zealand dollar is curtailing some economic activity.

The local economy has picked up better and faster than the central bank forecast in its last monetary policy statement, back in June, but the debt problems facing the North Atlantic economies have dominated the news since then and these problems are expected to affect demand for New Zealand exports and also tourism traffic from those countries.

"Trading partner growth, while weaker in the near term, is assumed to recover in 2012...nonetheless, there is a real risk that global economic activity slows sharply, as during the global financial crisis."

The Reserve Bank forecasts trading partner growth to average 3.4% for the year to March, down form a previous forecast of 4.3%. The following year is now expected to be 4.3%, from a previous forecast of 4.6%.

High commodity prices and the Canterbury rebuild are expected to help sustain local demand, Dr Bollard said.

The New Zealand dollar is having a"dampening influence" on the economy but it is now forecast to stay high, and for a longer period, than previously expected.

The central bank has also significantly revised its outlook for the currency on a trade weighted index (TWI) basis.

Back in June the TWI was forecast to peak at 68.8 in the last quarter and stay around 68 until the latter part of 2012 before declining to 66 by March 2014.

The forecast now is for the TWI to go to 72.5 in the current quarter and stay at or around 72 for another 12 months.risk

Even after that the drop is projected to be small, down to 69 by March 2014. That is a major upwards revision for the New Zealand currency.

"Largely because the New Zealand economy has been doing better than many others, the New Zealand dollar has appreciated since the June statement," Dr Bollard said this morning.

"The high level of the New Zealand dollar is having a dampening influence on some parts of the tradable sector and on imported inflation."

View the Monetary Policy Statement page http://www.rbnz.govt.nz/monpol/statements.

Watch the live media conference here.