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Bollard holds OCR at 2.5%, signals higher bank funding costs

Move widely expected. RBNZ says global economy remains fragile.

Rob Hosking
Thu, 26 Jan 2012

The Reserve Bank has held the official cash rate at 2.5% as widely expected.

Global economic uncertainty means New Zealand banks can expect higher funding costs this year, says the Reserve Bank.

"The European debt crisis has...increased the cost of international funding, which will likely pressure funding costs for New Zealand banks over the coming year," Reserve Bank governor Alan Bollard said.

That is likely to mean - although Dr Bollard did not spell it out - that retail interest rates will rise regardless of what he does with the official cash rate (OCR).

Dr Bollard opted to hold the OCR at 2.5% at this morning's review - as unanimously expected by economists who follow the New Zealand market.

"Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5," he said in this morning's statement.

"World prices for New Zealand's export commodities have remained elevated but the recent appreciation of the New Zealand dollar is reducing exporters' returns," Dr Bollard said.

However he stopped short of saying the New Zealand dollar - which has risen from around 75US cents before Christmas to above 81US cents earlier this week - is over-valued.

"In the domestic economy we continue to see modest growth. Over recent months there have been signs of a limited recovery in household spending and the housing market."

The economy is also expected to see some sort of lift from the repairs and reconstruction in Canterbury "although there may be further delays resulting from aftershocks."

Dr Bollard is tomorrow to deliver his annual set-piece speech at the Canterbury Employers and Chamber of Commerce and is expected to provide more information on the Reserve Bank's outlook for the year.

Rob Hosking
Thu, 26 Jan 2012
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Bollard holds OCR at 2.5%, signals higher bank funding costs