RBNZ hold at 2.5%

LATEST: The Reserve Bank is holding official interest rates at 2.5 per cent, as the global economy worsens in the face of the European debt crisis.

"There is a risk that conditions weaken further," Reserve Bank Governor Alan Bollard warned this morning.

Given the current "unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the official cash rate on hold at 2.5 per cent," Bollard said this morning.

Monetary policy was expected to remain "supportive for some time" with the Reserve Bank's expected track for ninety day interest rates now lower for longer than expected in the September statement.

There were "continued difficulties" related to country and bank debt in a growing number of European economies, and financial markets were highly volatile.

International activity had softened including the Asia-Pacific region.

The global slowdown was hitting New Zealand, but the impact so far was limited, Bollard said.

While the central projection was for a "moderate downturn in global activity" risks around that outlook had intensified significantly, the Reserve Bank said in its December Monetary Policy Statement.

That was mainly because of the concerns about the strength of Europe, where activity had worsened faster than expected in recent months.

A sharper than expected slowdown in Europe would "materially reduce activity in other regions including Asia and Australia".

If things turned out worse than now expected, global trade and commodity prices would fall and global activity could remain weak for an extended period the bank said.

Growth in New Zealand would also be weaker than assumed in the central projection of the bank which suggests growth picking up to about 3 per cent in the year to March 2013.

If that happened monetary conditions would need to remain supportive for an extended period, even as the Christchurch rebuild boosted demand.

Meanwhile the Reserve Bank said that business confidence had fallen this year and investment spending was likely to remain weak for some time.

Tight international financial markets meant that it would cost more for New Zealand banks to borrow overseas to some degree in the coming year.

"There remains a high degree of uncertainty around the global outlook and there is a risk that conditions weaken further," Bollard said.

In New Zealand domestic activity was still expanding, but modestly.

Export commodity prices remained high, though off recent peaks.

The fall in the Kiwi dollar had provided some support for the export sector.

However, the Reserve Bank's projections for economic growth were modest, with quarterly growth of 0.6 per cent in the last quarter of this year, rising to 0.8 per cent by the end of 2012."Over time repairs and reconstruction in Canterbury will also provide a significant boost to demand for an extended period," he said.
The rebuild was expected to cost about $20 billion over a number of years, but widespread work would only start in earnest in the second half of next year, peaking in early 2014. The outlook for rebuilding in Christchurch also remained highly uncertain, but eventually it would provide a boost like the mid 2000s building boom.

Annual GDP was projected to be 2 per cent in the year to March 2012, rising to about 3 per cent in the following March year, despite the expected pick up from rebuilding in Christchurch.

Unemployment is projected to trend down slowly from 6.6 per cent now to 5.6 per cent by March 2013.

Annual inflation was estimated to have returned to the central bank's target band of 1 per cent to 3 per cent in the December quarter, with underlying annual inflation about 2 per cent.

- BusinessDay.co.nz JAMES WEIR Last updated 09:11 08/12/2011