OCR unchanged at 2.5 percent

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.

Reserve Bank Governor Graeme Wheeler said: “Global growth is set to recover in 2013 with economic indicators improving in many of our trading partners. Consistent with this, global financial market sentiment is positive, contributing to lower bank funding costs and some reduction in interest rates faced by households and firms in New Zealand.

“Domestically, recent data on business confidence and construction activity suggest GDP growth is recovering from the softness seen through the middle of last year. The Canterbury rebuild is gathering momentum and its impact will be felt more broadly in incomes and domestic demand. House price inflation has increased and we are watching this and household credit growth closely. The Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.

“Inflation remains subdued and is currently just below the bottom of the Reserve Bank’s inflation target range. This mainly reflects the impact of the overvalued New Zealand dollar. The high currency is directly supressing inflation on traded goods, and is undermining profitability in export and import competing industries. At the same time, the labour market remains weak and fiscal consolidation is dampening growth.

Overall, we expect economic growth to strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2 percent target midpoint.

“On balance, it remains appropriate for the OCR to be held at 2.5 percent.”