OCR unchanged at 2.50%

Reserve Bank Governor Alan Bollard held the official cash rate at 2.5% as expected and said while economic activity showing signs of stabilising, the high New Zealand dollar was helping to keep the economy "weak." The kiwi tumbled after his statement.

Thursday, July 30th 2009, 9:00AM

by Paul McBeth

"The level of the dollar in particular, is not helping the sustainability of future growth and brings with it additional economic risks," Bollard said in Wellington today, referring to the surge in the New Zealand dollar over the past four months which has hindered the prospect of a desired export-led recovery. "The outlook remains highly uncertain" with the rise in global commodity prices not flowing into the raw materials produced domestically and "it will be some time before growth returns to healthy levels," he said.

Exporters say the resilient kiwi dollar, which has climbed about 33% from its lows in March, is eroding returns in already weak world markets. Fonterra Cooperative Group chair Henry van der Heyden said the exchange rate was putting downward pressure on milk prices as he announced a steady outlook on prices yesterday.

"The strength in the NZ dollar continues to undermine the economic outlook, and we continue to see the case for further stimulus," said Jane Turner, economist at ASB Bank, in a report before the announcement.

The New Zealand dollar traded at 64.96 U.S. cents, from 65.70 cents immediately before the release. The trade weighted-index fell to 61.14 from 61.68 before the report. Exports for the month of June fell 11% to $3.2 billion from the same month a year earlier.

Bollard embarked on the steepest series of cuts to the OCR in July last year, and has slashed 575 basis points from the benchmark rate as he seeks to lift the economy out of its deepest recession in more than 30 years.

The resurgence in the property market prompted Bollard to warn households against resuming a mentality of "borrow and spend" last month, and while he didn't reiterate this sentiment today, he reiterated that interest rates were higher than assumed in the central bank's forecasts.

Last month, Bollard criticised banks for failing to pass on cuts to the OCR into their floating and short-term rates, and politicians waded into the issue when a Parliamentary Finance and Expenditure Committee report did likewise. The committee later voted against holding an inquiry into the banks' profit margins, but members of the opposition are currently taking submissions for their own investigation.

While net migration, lower taxes and interest rates reignited demand in the housing market, Bollard shied away from the optimistic outlook held by his Australian counterpart Glenn Stevens, who hinted the RBA may hike rates before unemployment peaked, saying New Zealand will probably see a "patchy recovery" beginning near the end of this year.

Bollard also repeated his view of the past two months that interest rates would remain at or below current levels until late next year, and took inflation off the table as a major influence on his decision, saying it was "well within the target band" and was expected to track "comfortably" in this range in the medium-term.

"The RBNZ is on hold for some time, and we expect market pricing to eventually converge to that view," said ANZ economists in a report before the central bank's statement. "Further easings are unlikely at this stage."

New Zealand business confidence climbed to a seven-year high in July with a net 19% of firms expecting business conditions to improve in the coming year, according to yesterday's National Bank Business Outlook. The results suggest "the light at the end of the recession tunnel may be just around the corner," said Cameron Bagrie, chief economist at ANZ National Bank.

Tempering optimism about the outlook, government figures yesterday showed home-building consents tumbled in June, reflecting a drop-off in apartments from the previous month and the continuance of broadly weak issuance levels.

At the same time, commercial building consents fell to $307 million, the lowest since September 2007, partly reflected by one-off projects in prior months, including development at Christchurch airport.

Paul is a staff writer for Good Returns based in Wellington.

Tags: Mortgage Rates OCR