Interest rates held at 2.5%, September rise signalled

Reserve Bank governor Alan Bollard this morning kept the official cash rate (OCR) at 2.5% but signalled the next review, due in mid-September, will almost definitely see a rise.

Whether this will be the start of a series of increases, or simply a reversal of March's "insurance" rate cut from 3%, appears very much an open question.

"Provided current global financial risks recede and the economy continues to recover, the bank sees little need for the March 2011 'insurance' cut to remain in place much longer," Dr Bollard said this morning.

The Reserve Bank cut the rate in March in response to the Christchurch earthquake, but since then the economy has performed much more strongly than the Reserve Bank - or most other forecasters - expected.

"The current very high value of the New Zealand dollar is acting as drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term."

There is also a warning about both wage and price inflation as the economy recovers.

The recent spike in annual inflation is mostly caused by the rise in GST last October, "and will therefore be temporary," Dr Bollard said.

"Wage and price setters should focus on underlying inflation, which is currently estimated to be below 2.5%."

But it is global risks which seem to be the biggest worry.

"Current fragility in global financial markets, including the uncertainty around the US government's debt ceiling, continues to highlight the downside risk to trading partner activity" which the Reserve Bank stressed in its June monetary policy statement.

The next OCR review, which will be accompanied by a full monetary policy statement and an updated set of economic forecasts, is due on 15 September.

Rob Hosking
Thu, 28 Jul 2011

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Interest rates held at 2.5%, September rise signalled