Kiwis leave cash rate at record high

New Zealand Reserve Bank Governor Alan Bollard cited greater than usual uncertainty in global markets and inflationary concerns as two of the main considerations for leaving the country’s official cash rate unchanged at a record high of 8.25 per cent.

Bollard said credit concerns and heightened risk aversion globally had increased the likelihood of a weaker economic outlook for New Zealand’s key trading partners, including the United States, with subsequent flow on effects for its economy.

“However, we continue to expect a significant boost to the economy over the next two years from the sharp rise in world prices for dairy products and some other commodities that has occurred over the past year,” Bollard said.

He added that previous attempts by the Reserve Bank to ease inflationary pressure by rising the official cash rate to slow domestic spending was beginning to pay off, with household borrowing growth slowing and turnover in the housing market continuing to fall.

However, he warned that in the short term, CPI inflation was likely to rise due to the effects of a lower exchange rate and higher food prices.

“The recent collapse of a number of finance companies and reduced liquidity within the non-bank lending institution sector generally could further act to dampen activity in some areas of the economy, such as property development or consumer financing,” Bollard said.

“But at this point, we believe that the current level of the official cash rate is consistent with future inflation outcomes of 1 to 3 per cent on average over the medium term.”