Bollard holds OCR, points to lower growth

Lower interest rates - and lower growth - were signalled by the Reserve Bank this morning.

The central bank opted to keep the official cash rate at 2.5%, as most economists expected.

The full monetary policy statement, issued with the OCR decision, forecasts restricted growth over the next few years, primarily because of the debt hangover from the latter part of the last decade and a more risk averse investment environment.

Other factors include an expectation the eurozone will remain in recession for the current year and only recover slowly thereafter, and a tight fiscal policy aimed at returning the government accounts to surplus by 2015.

"The economy's potential growth rate has fallen in recent years," says the bank's latest outlook.

GDP growth grew 1.7% last year and is forecast to rise to just over 3% next year.

That may be as good as it gets, for a while.

The European economic conniptions are likely to affect New Zealand not so much directly, as the region is not a large export destination, but indirectly, through the eurozone's slowdown hitting New Zealand's other trading partners.

"Europe is an important export customer for much of Asian, particularly China."

Chinese growth is already slowing, and a drop off in investment growth points to weaker growth in the future.

The central bank also points to domestic factors such as the government's tighter spending track.

"Discretionary revenue and expenditure decisions made through the second half of the 2000s, along with weak GDP growth and the fiscal costs associated with the Canterbury earthquakes, have seen the fiscal balance deteriorate markedly.

"Government debt, while low by international standards, has risen sharply."

Those increases are now being pared back and "such tightening will have a negative influence on demand growth".

And households remain cautious.

The recent cuts to retail interest rates by banks have seem some increase in borrowing but on the whole, households are paying off debt rather than adding to it.

"Household income growth has outpaced spending growth in recent months as households have continued to focus on debt consolidation.

"In addition, many households have maintained the level of their borrowing repayments despite the reduction in mortgage rates, and have consequently increased principal repayments on outstanding mortgages."

Business investment is more mixed, but with "lingering uncertainty" about the economic outlook, both domestically and globally, capital investment has been weak this year.