OCR unchanged, mid-year hike reiterated

Reserve Bank of New Zealand Governor Alan Bollard kept the Official Cash Rate unchanged at 2.5%, as expected, and reiterated a mid-year start to rate hikes, saying the subdued pace of recovery will restrain inflation.

Thursday, March 11th 2010, 9:01AM

by Jonathan Underhill

"The relatively sluggish recovery predicted in recent statements continues to play out," Bollard said in Wellington today.

"Households are still cautious, with house sales and credit growth remaining subdued. Business spending is weak despite much improved confidence."

All 17 economists in a Reuters survey correctly predicted Bollard would stand pat on interest rates today. Before today they were forecasting a 25 basis point hike in the OCR by June 30 and 1.25 percentage points of increases to 3.75% by the end of the year.

The recovery from last year's recession has been more muted than many analysts had expected, with the jobless rate reaching a 17-year high, while building consents have tapered off and consumers pared spending on debit and credit cards, suggesting they're still fretting about job security and the value of their homes. Consumer prices fell 0.2% in the fourth quarter.

Still, companies are anticipating a gradual recovery. Business confidence has climbed to a 10-year high and data this week showed the terms of trade improved in the final quarter of 2009.

"Growth will gather momentum this year," Robin Clements, senior economist at UBS New Zealand, said before today's statement.

Keeping the OCR at 2.5% maintains Australia's rate advantage at 1.5 percentage points after the Reserve Bank of Australia extended its tightening last week by lifting its cash rate to 4%. The rate gap, coupled with data showing Australia's economy is on a tear, has helped drive the kiwi dollar to a 10-year low against its Australian counterpart.

To read Bollard's full speech, click here.

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